INSOLVENCY LAW REFORMS IN THE ASIAN AND PACIFIC
REGION
ON TA 5795-REG: INSOLVENCY LAW REFORMS*
I. INTRODUCTION
1. Since October 1998 the Asian Development Bank (ADB) has been
extensively involved in insolvency and related law and policy
reform in the Asian region. In the 1999 edition of this publication,
the Office of the General Counsel presented interim findings of
the Regional Technical Assistance for Insolvency Law Reform (TA
No. 5795-REG) (hereinafter "RETA") subsequent to a Symposium held
at the Bank's headquarters from 25-26 January 1999 (hereinafter
"January Symposium"). The following is the final report on the
RETA in relation to the corporate insolvency laws and practices
of eleven Asian economies subsequent to a second Symposium held
at the ADB's headquarters from 25-26 October 1999 (hereinafter
"October Symposium").
2. Also, and very importantly, work carried out under this RETA
and a complementary regional technical assistance (TA No. 5773-REG:
Secured Transactions Law Reforms), and featured elsewhere in this
publication [2] highlights the important relationship between
secured transactions and insolvency laws. In particular, it presents
the work of the ADB to foster an understanding of the need for
an integrated approach to law reform in these areas. It also includes
a report on the discussions of a joint session at the October
Symposium between participants under this RETA and participants
of a Symposium on Secured Transactions Law Reforms. [3]
A. The Global and Regional Economic Backdrop
3. Insolvency law rarely attracts much more than a fleeting interest
and ranks low on any government's reform agenda. The commercial
community, though sometimes aroused, is also largely disinterested
in the subject. Legal and other scholars rarely concern themselves
with insolvency law issues. It is thus quite remarkable that,
during the last decade of the last century, corporate insolvency
laws and related practices should have assumed an unparalleled
national, regional and global importance.
4. Three, largely unrelated, economic causes or factors contributed
to this unique prominence. The first in time was the economic
recession that affected many of the more developed economies early
in that last decade. Following the economic boom of the mid 1980's,
stock and property values declined sharply. As many corporations
had borrowed extensively during the boom years, the crash resulted
in widespread corporate collapse. This produced in many of the
economies affected by the recession intensive endeavors at a national
level to develop or further develop corporate rescue and associated
informal insolvency techniques. It also led to the most concerted
endeavors yet undertaken to provide regional and global foundations
to take account of cases of cross-border corporate insolvency.
5. The second cause was the collapse of command economy practices
and associated political ideologies in a large part of the world
and the consequent process of economic transformation throughout
the decade toward market based economic practices. In the economies
affected by that economic change the need was for the establishment
of insolvency law regimes to take account of insolvent state-owned
enterprises. Previously there had been no such regimes because
there was no need.
6. The third was the regional economic crisis that affected many
economies in the Asian region in the last years of the decade.
This exposed, amongst many other things, the inadequacy of corporate
insolvency law regimes or their application in many of those economies.
It resulted in widespread endeavors to improve the quality of
the insolvency laws and their application. These economic and
historical events have made an indelible and revolutionary mark
on national, regional and global insolvency law development.
7. The insolvency law developments were driven, in part, by an
appreciation that insolvency and related laws were vital to economic
development and stability. At a local or national level, this
appreciation resulted in many countries developing or substantially
reforming their respective insolvency law regimes. That, in turn,
has impressed upon governments the importance and need to maintain
insolvency law regimes under constant review, in contrast to long
gaps in time between sporadic, haphazard and, at times, impulsive
reform. In addition, the banking and financial sector commenced
the development of informal corporate insolvency techniques to
overcome defects in, supplement, or provide an alternative to
formal insolvency law regimes.
8. At a regional level, countries in trading blocks (such as
the economies of the European Union and the economies of the North
American Free Trade Area) have advanced the need for regional
co-operation and assistance in the development and application
of insolvency laws. At a global level, the convergence of these
events and the realization that trade and commercial development
is at the heart of economic development has led to endeavors by
the major multi-lateral agencies to develop universal principles
of insolvency law regimes. In addition, considerations of multinational
trade and commerce have afforded a real prospect of international
co-operation and assistance in cases of cross-border insolvency.
For example, the United Nations Center for International Trade
Law (UNCITRAL) Model Law on Cross-Border Insolvency [published
in UNCITRAL Yearbook, vol. XXVIII, 1997] may soon be adopted and
applied by a number of countries.
B. Recent Insolvency Law Developments in the Asian Region
9. Before the onset of the Asian financial crisis insolvency
laws of many Asian economies were, generally speaking, out of
date and irrelevant to modern commercial needs. In many cases
the insolvency laws had been imported from overseas jurisdictions
at the turn of the last century, and had never been reviewed.
Available statistics indicate that in many of the economies there
had been no cases of corporate bankruptcy at all. In some of the
economies there were no experienced judges, administrators or
professionals to administer the insolvency laws. Related laws
and practices, such as those relating to debt recovery and security
enforcement, were similarly defective. The area of secured transactions
was quite undeveloped in many of the economies.
10. Despite that most of this was (or should have been) reasonably
apparent, the buoyant economic conditions that many of the economies
enjoyed during the first half of the last decade placed the prospect
of insolvency and related law reform out of consideration. In
the economic circumstances that then prevailed there was little
opportunity of engaging many of the economies in discussions concerning
the need to review, reform and modernize those laws and the institutional
capacity to apply them.
11. The onset of the financial crisis changed all that, and produced
an environment in which insolvency and related law reform became
an important part of governments' reform agendas. The lack of
frameworks for the systematic restructuring of insolvent or financially
distressed corporations or the liquidation of businesses incapable
of being restructured posed impediments throughout the region
to economic recovery, complicated the rehabilitation of financial
sector institutions, inhibited the growth of domestic markets
and stifled foreign investment. 'Framework' in this context extended
to outmoded insolvency laws, inadequate court systems and weak
enforcement and administration of both laws and procedures. These
problems, although presciently evident, were largely ignored or
circumvented in the 'boom' economy that preceded the advent of
the crisis. A study on insolvency law reform in the region was,
therefore, timely, particularly if investor confidence in the
RETA economies was to be restored.
12. Law and practices relating to debt funding, debt recovery,
secured transactions and formal insolvency processes were subjected
to critical scrutiny and review. For example, new corporate reorganization
chapters of the insolvency laws of Indonesia and Thailand were
enacted, and proposals for corporate insolvency law reform in
Hong Kong, China were advanced. Six of the RETA economies commenced
the promotion of informal corporate work-out processes. Thus,
when this technical assistance commenced in October 1998, a process
of law and commercial reform was under way in many of the economies
that were most effected by the crisis.
13. Since the commencement of the technical assistance further
progress has been made. In Thailand some adjustments have been
made to the already reformed insolvency law and a new court with
exclusive jurisdiction in bankruptcy was established. In Indonesia
a new commercial court with bankruptcy jurisdiction has been established.
A further major reform of the insolvency law has been proposed.
In the Philippines a detailed set of new rules to guide formal
corporate insolvency reorganization procedures has recently been
announced.
14. Korea has commenced a total review and reform of its insolvency
law system. Japan is actively pursuing reforms to its corporate
insolvency laws, and India has established a committee to redraft
its corporate insolvency laws. In Pakistan a set of rules to enable
the 'sick' company provisions of the corporate insolvency law
to operate has recently been proclaimed. In Hong Kong, China the
corporate insolvency reform proposals are nearing legislative
action. In Thailand a new secured transactions law has been drafted.
In Indonesia, Thailand, Malaysia, and Korea, the informal work-out
processes have commenced to operate, in some cases with considerable
success.
15. In some of the RETA economies attention has been given to
corporate governance and related issues. Endeavors are being made
to improve corporate accounting and reporting standards. And,
in RETA economies that were hardest hit by the financial crisis,
the banking and financial sectors have been the subject of extensive
investigation, rearrangement and reform.
16. However, there still remains much to be done. A number of
the insolvency laws are still out of date and irrelevant to economic
and commercial needs. Some of the recent reforms require further
review. In some of the RETA economies the institutional capacity,
particularly of the courts and government agencies, to apply the
insolvency laws requires considerable expansion and improvement.
17. In a number of the RETA economies the inefficiency of related
processes, such as debt recovery and security enforcement laws
and processes, creates a commercial imbalance in debtor-creditor
law. It often has the unintended result of a 'debtor friendly'
system and places unwanted and unnecessary pressure on insolvency
laws to somehow create a balance. It can also have adverse economic
effects by, for example, affecting the availability and the cost
of corporate finance.
18. There is also a significant need to encourage the development
of and compliance with proper standards of corporate governance
and corporate management. Serious deficiencies in these areas
undermine the effect of even the most advanced forms of corporate
insolvency law regimes.
19. The region as a whole also requires endeavors to promote
regional and country specific co-operation in cases of cross-border
insolvency. Finally, knowledge and experience to deal with corporate
reorganization, in both formal and informal processes, is required
at a number of levels. This requires continued and long-term education
and training programs.
C. The RETA Design
(i) Purposes and Goals
20. The aim of the RETA was to focus on structures and processes
available for the rehabilitation and restructuring of insolvent
corporations and the liquidation (or bankruptcy) of corporations
that are incapable of rehabilitation. It was to bring together
government officials responsible for insolvency law reform and
insolvency administration, judges, bankers, insolvency practitioners
from both the legal and accounting professions and academic experts
to consider the state of insolvency law regimes in the region
and the responses of governments.
21. However, the purpose of the RETA was not solely to address
the immediate effects and consequences of the economic crisis
or to propose immediate and rushed solutions to the many problems
presented by it. The RETA was designed with the much broader and
longer term aim of encouraging the greater development of legal
and commercial systems, practices and institutions relative to
insolvency law, for application in all circumstances. The broad
aims of the RETA were to:
i. Study the relationship between corporate debt and the insolvency
or financial difficulty of corporate debtors in the region;
ii. Make recommendations that are suitable for the region to
effectively deal with a problem of corporate insolvency and
recovery of debt; and
iii. Make available through the Internet (www.insolvencyasia.com),
the insolvency and other related legislation of the RETA economies
and the studies and reports produced as a result of the project.
(ii) Areas of Inquiry
22. An insolvency law is but part of an overall system of law
and the economic, commercial and social environment in which that
system functions. It relies for its effectiveness on the institutional
infrastructure that is necessary to support the system of law.
Further, the study of insolvency law cannot be addressed in isolation
as an insolvency law will normally both influence and be influenced
by a large number of economic, legal, commercial, social and cultural
considerations (see Appendix 1 for insolvency law influences).
The RETA was thus designed accordingly.
23. The discovery process commenced by inquiring into and addressing
background areas. These areas included the following:
· Corporate Sector: An examination of the private corporate
sector, including issues such as the incorporation of companies,
accounts and accounting standards, directors and corporate governance,
family control of corporations, equity holdings and other influences
of banks in corporations, conglomerates of corporations, and
political and government association with corporations.
· Banking and Financial Sector: An examination of the banking
sector, including controls on banks, association with borrower
corporations, lending and loan administration practices and
control of systemic banking sector financial difficulties.
· Social, Cultural and Other Influences: An examination of
the influences relevant to commercial culture and attitudes,
in particular attitudes toward formal legal processes, the utilization
of court and other systems for dispute and other resolution,
the use of informal processes and the availability of skilled
professionals for advisory and other work.
· Corruption, Bribery and Fraud: An examination of corruption,
bribery and fraud, and the influences it may have generally
on commercial practices and, in particular, on the operation
of the legal system, including the operation of the courts and
the insolvency laws.
· Legal System and Institutions: An examination of the legal
system generally, its origins and the influence of foreign based
laws and institutions, attitudes toward and the extent of 'globalization'
of legal processes and commercial practices.
· Secured Transactions and Enforcement: An examination of
property laws, including ownership and registration systems,
the creation of security interests in property, issues of registration
and priority of secured interests and enforcement of secured
property rights.
· Debt Recovery: An examination of the extent of credit trading
and the recovery and enforcement of unsecured debt.
(iii) Methodology
24. A work guide was prepared by the ADB's international experts
for the guidance of the local experts. The sections of inquiry
included forms and structures of business organizations; the banking
system; forms of financing for business enterprises; secured financing
and enforcement; unsecured financing and recovery of debt; commercial
and cultural attitudes toward financial difficulty, debt recovery
and insolvency; the insolvency law regime and its operation; the
use of informal insolvency processes; the court system and institutions;
and foreign and cross-border aspects of insolvency law.
25. Individual studies for each of the RETA economies were prepared
by the local experts (the 'local studies') based on the work guide.
The local experts also made available copies of insolvency and
other relevant legislation together with copies of guidelines
for the operation of informal insolvency techniques. A Comparative
Report (hereinafter the "First Comparative Report") was prepared
by the international experts. It, together with the local studies,
were reviewed and discussed at the January Symposium. A summary
of the results of the January Symposium and the work of the RETA
to that point in time was prepared and published by the ADB in
the 1999 edition of this publication (hereinafter the "1999 Report").
26. The second phase of the RETA concentrated on a more detailed
examination of particular issues in five of the RETA economies.
These economies comprised Indonesia, Thailand, Malaysia, Philippines
and Korea. The second phase was designed to take account of significant
insolvency law and related developments in those economies during
the relatively short period of nine months since the date of the
January Symposium.
27. The methodology for this phase of the RETA was similar to
the first phase. The local experts in the five selected RETA economies
prepared further local studies. These addressed areas of recent
development including numbers and studies of formal and informal
corporate insolvency case techniques; corporate management; lending
and credit control practices of banks and other financial institutions;
secured lending transactions; problems in the application of both
formal and informal insolvency processes; the operation of the
judicial system in relation to insolvency regimes; the efficiency
of informal insolvency practices; public and private case management
administration of liquidations and reorganizations; the availability
and quality of information and statistics relating to corporate
insolvency; and actual or proposed reforms to the insolvency law.
28. Based on the supplementary local studies and field visits
to the five selected RETA economies, a second comparative report
was prepared which critically analyzed the above areas and proposed
recommendations for reform and further development. This comparative
report along with the supplementary local studies were reviewed
and discussed at the October Symposium. The October Symposium
was combined, in part, with the Symposium on Secured Transactions
Law Reforms. This presented a unique opportunity for a significant
discussion of issues arising from the intersection of corporate
debt financing, secured transaction financing and corporate insolvency.
29. The two symposiums were attended by government, quasi-government
officials and the judiciary from the selected RETA economies,
India, Pakistan, People's Republic of China, and Singapore. The
Symposiums were also attended by representatives from academia,
the legal and accounting professions, and by representatives from
other multilateral and international financial institutions, including
the International Monetary Fund (IMF), Organization for Economic
Cooperation and Development (OECD), UNCITRAL, World Bank, and
the International Law Institute.
30. All of the local studies, comparative reports, the final
report, and this publication will be made available on the internet.
The URL is www.insolvencyasia.com.
II. THE CORPORATE INSOLVENCY LAW IN THE RETA ECONOMIES
31. This section sets out the main features of a typical corporate
insolvency law regime followed by survey of the corporate insolvency
law regimes of the RETA economies.
A. Basic Elements of a Formal Corporate Insolvency Law Regime
32. One of the most important aspects of an insolvency process,
whether a formal or informal process, is that it is a collective
procedure. That alone distinguishes it from practically any other
procedure known under any system of law or legal tradition (the
procedure known as the "class action" might come closest to its
collective nature). A collective process of this nature has to
endeavor to accommodate all of those who are affected by or have
an interest in the insolvent debtor. That, as will be seen, presents
particular problems and issues. These are not easy problems to
address in any environment.
33. The range of interests that need to be accommodated by an
insolvency law include the insolvent debtor; its directors and
shareholders; creditors who are secured to various degrees; employees;
fiscal creditors; guarantors of the debtor; unsecured creditors.
It also includes government, commercial and social institutions
and practices of which some account must be taken in prescribing
an insolvency law regime and in the practical operation of such
a regime. No one person nor group of persons or institutions may
assert a claim to be unaffected or uncontrolled by an insolvency
law.
34. A corporate insolvency law regime may be expected to provide
for two types of process. One is liquidation (or "winding-up"
or "bankruptcy", as it is sometimes called). The other is rescue,
a generic term which embraces a number of processes variously
titled as "composition", "arrangement", "reconstruction", "rehabilitation"
and so forth. Other processes of various descriptions that provide
for particular circumstances might also form part of the regime.
(i) Liquidation
35. The remedy of liquidation is a long historical and traditional
method of dealing with the insolvency of a corporation. It is
used, in effect, to terminate the commercial activities of an
insolvent corporation. Liquidation tends to be close to "universal"
in its concept, acceptance and application. It normally follows
a pattern that includes:
· an application to a court or tribunal either by the corporation
itself or by creditor(s);
· an order or judgment that the corporation be liquidated;
· the appointment of an independent person to conduct and administer
the liquidation;
· the immediate closure of the business activities of the corporation;
· the termination of the powers of directors and employment
of employees;
· the sale of the assets of the corporation;
· the adjudication of claims of creditors;
· distribution of available funds to creditors (under some form
of priority); and
· the ultimate dissolution of the corporation.
36. The liquidation process is justified by the application of
economic and legal theories. The economic theory maintains that
in a competitive market economy an enterprise that is unable to
compete has no place in and should be removed from the market
place. A principal identifying mark of an uncompetitive enterprise
is one that becomes insolvent. The legal theory supplements this
by maintaining that such a process can only function effectively
if it is regarded as a collective process, from the time of its
inception. It follows that an ordered, civilized administration
is necessary under which all creditors (of varying ranks and classes)
should be bound and treated equally. The combination of these
theories has cemented the liquidation process as the necessary
basic component of a corporate insolvency law regime.
(ii) Rescue
37. In the context of this report "rescue" means any form of
process, by whatever name called, which provides for the continuation
(and not the liquidation) of an insolvent corporate debtor. This
may take the form of a composition, by which the debtor and the
creditors agree to a simple compounding of debts. For example,
the creditors agree to receive a percentage of the debts they
are owed in full, complete and final satisfaction of those debts.
The debts of the corporation are thus reduced or satisfied, it
becomes solvent and may continue on.
38. A rescue might also take the form of a complex reorganization
under which, for example, the debts of the debtor are restructured
(extended length of loan, extended period in which to make payment,
deferral of payment of interest, possible change in the identity
of lenders and so forth); the possible conversion of some debt
to equity together with a reduction (or, even, extinguishment)
of existing equity; the sale of some of its non-core assets; and
the closure of non-profitable business activities.
39. However, rescue does not imply that the corporation, its
creditors and its shareholders are or will be completely restored.
Nor does rescue necessarily mean that ownership and management
of an insolvent corporation will maintain and preserve their respective
positions. In general, however, rescue does imply that under whatever
form of plan, scheme or arrangement is agreed, the creditors will
eventually receive more than if the corporation was immediately
or soon liquidated.
40. Although something approaching a "rescue" process has been
part of the insolvency law regimes of many countries for some
time, they were generally very conservative in their nature and,
as a result, little used. Most have recently been replaced or
supplemented by more contemporary and efficient processes.
41. The "rescue" process is not so universal as that of liquidation
and thus does not follow such a common pattern or process. However,
to the extent that similarities may be detected among the widely
differing processes that might be termed "rescue", it may be said
that the key or essential elements include:
· the voluntary submission by a corporation to the process
(which may or may not involve judicial proceedings and thereafter
judicial control or supervision);
· an automatic and mandatory stay or suspension of actions and
proceedings against the property of the corporation affecting
all creditors for a limited period of time;
· the continuation of the business of the corporation either
by the existing management, an independent manager or a combination
of both;
· the formulation of a plan which proposes the manner in which
creditors, equity holders and the corporation itself (including
its business and assets) will be treated;
· the consideration of and voting on acceptance of the plan
by creditors;
· possibly, the judicial sanction of an accepted plan; and
· the implementation of the plan.
42. However, within that similarity of framework there are many
variations and divergences. The rescue concept, like winding up,
also rests upon a fusion of economic and legal theories for its
justification. The economic theory (which is a more contemporary
theory than the one that is used to justify the liquidation process)
maintains that not all enterprises which fail in a competitive
market place should necessarily be liquidated. A corporation with
a reasonable prospect of survival (for example, one which has
a profitable or potentially profitable business) should be given
that opportunity. It can be demonstrated that there is greater
value (and, by deduction, greater benefit for creditors in the
long term) in keeping the essential business and other component
parts of such a corporation together.
43.The legal theory maintains that rescue requires a law which:
· permits quick and easy access to the process;
· provides sufficient protection for all of those involved in
the process (which primarily includes the corporation and its
property and the various ranks and classes of creditors);
· provides a structure which permits the negotiation of a commercial
plan;
· enables a majority of creditors in favor of a plan or other
course of action to bind all other creditors by the democratic
exercise of voting rights; and
· provides for judicial or other supervision to ensure that
the process is not subject to unfair manipulation or abuse.
44. This legal theory also places considerable emphasis on the
concept of the collective nature of the procedure. It is of critical
importance to this modern process that the opportunity, whether
prompted by possible sanction or encouraged by possible benefit,
should be available to a corporation in financial difficulty to
commence the process before it is too late. It is also critical
to the modern rescue process that attempts by creditors, whether
secured or otherwise, to intervene upon the process and pursue
their independent individual rights should be restrained, by automatic
operation of the legislation, as far as possible.
45. Another essential requirement is that the process must be
transparent and be capable of relatively quick resolution. It
is not appropriate, in the modern context, for the rescue process
to be subject to delay or extensive time periods for the performance
of various parts of the process. The creditors of the corporate
debtor must be fully informed and involved in the decision process.
(iii) Special Insolvency Laws
46. In a market economy the liquidation and the rescue process
should not be the subject of political or government influence
or intervention. However, the presence of some exceptional economic,
social or other such circumstance might sometimes justify a special
process and the involvement or intervention of government. Typical
of such a process is one that might sometimes be applied when
the banking sector of a country is itself in financial difficulty.
B. Evaluation and Comparison of the Corporate Insolvency Laws
of the RETA Economies
47. The insolvency laws of the RETA economies can be conveniently
grouped into three main categories. The groupings are largely
dictated by historical reasons because, as may be seen, many of
the insolvency laws of the economies have been derived from common
sources. The three categories are:
·Category A. Those economies whose insolvency law regimes
have been largely derived from English and common law influences.
This group comprises Pakistan, India, Singapore, Malaysia and
Hong Kong, China.
· Category B. The second group comprises Japan, Taipei,China
and Korea. The core bankruptcy laws of these three economies
are all similar. They were derived from the same continental
European civil law source, as initially adopted in Japan and
later applied in the other two economies. A later adoption of
a United States reorganization law in Japan appears to have
been also used as a model for Korea and, to a lesser extent,
Taipei,China.
· Category C. The third group completes the remainder
of the economies, namely Thailand, Indonesia and the Philippines,
where the influences have been from different sources. The Thai
bankruptcy law appears to have been influenced by English law
models. The Indonesian insolvency law was based on Dutch law.
United States models influenced the principal parts of the Philippines
insolvency laws.
48. The laws of the economies in each of these three categories
are now briefly examined.
(i) Category A: English Law Based RETA Economies
49. In these economies the essential corporate insolvency law
is contained in companies or corporate legislation. In most cases
it remains in the same basic framework and with the same content
as English type companies legislation of some decades ago. Thus,
in each of the five economies in this category, there is a liquidation
(or winding up process) and a 'scheme of arrangement' process
that, very broadly, corresponds to a 'rescue' process. Only one
economy, that of Singapore, has enacted a more modern corporate
rescue law. In both India and Pakistan a government inspired and
controlled rescue process has also been developed.
(a) Pakistan
50. The essential corporate insolvency law is part of the Companies
Ordinance, 1984. This is supplemented, in part, by a provincial
insolvency law that provides for claims of creditors and for priorities
between creditors. The provisions relating to corporate insolvency
have never been reformed nor revised since their adoption many
decades ago.
51. Liquidation Process. The Companies Ordinance provides
for the liquidation of an insolvent company (through both debtor
and creditor driven mechanisms). This part of the law is reasonably
sound, though it could be modernized and improved.
52. Reorganization Process. The reorganization part of
the Companies Ordinance provides for a form of reorganization
known as a 'scheme of arrangement'. This part of the law is outdated,
and meets only a few of the good practices standards. Such statistics
as are available in Pakistan reveal no recent use whatsoever of
the reorganization provisions. Similar scheme of arrangement provisions
as can or were once to be found in English, Australian, New Zealand,
Hong Kong, China and Singapore legislation have long been regarded
as unsuitable for modern commercial needs and either have been
discarded and replaced by more contemporary legislation or are
in the process of being discarded and replaced.
53. Special 'Sick' Companies Process. A section of the
Companies Ordinance relates to companies that own 'sick industrial
units'. This legislation was inserted as a result of amendments
to the Ordinance in 1984. It appears to have been modeled on a
new law that was then proposed for enactment in India. The Pakistan
legislation enables a company that is declared to be financially
'sick' to submit a plan of rehabilitation for ultimate approval
by the government.
54. Despite the fact that this process was legislated for in
1984, it has not been applied because it was not until 1999 that
the government framed rules or regulations for its operation (Companies
[Rehabilitation of Sick Industrial Units] Rules 1999). These rules
provide for the establishment and constitution of a government
'Task Force' and a 'Bankers Committee'. The Bankers Committee
may refer a company that is facing financial or operational problems
to the Task Force. If, following some inquiry, the Task Force
is of the opinion that the company is a sick unit, the Task force
is required to refer the company to the Federal Government. The
government may then declare the company to be 'sick' and require
the Task Force to prepare a plan for the rehabilitation of the
company. A plan is then submitted to the government for approval.
The Task Force may prescribe its own procedures and may employ
experts and advisors from a wide range of disciplines to assist
the Task Force in its work and functions. (b) India
55. Core Provisions. The relevant 'core' corporate insolvency
law is contained in the Companies Act, 1956. It provides for liquidation
and scheme of arrangement processes. The same observations that
are made in relation to these processes in Pakistan apply to them.
56. Special 'Sick' Companies Process. In 1985 the Indian
government enacted legislation regarding the rehabilitation of
'sick' companies. This is contained in the Sick Industrial (Companies
Special Provisions) Act, 1985. It provides a model for dealing
with systemic problems of corporate financial disability, particularly
in relation to state owned or state controlled industries or industries
that might be considered of national economic importance. Under
this special purpose legislation an administrative Board for Industrial
and Financial Reconstruction was established. A sick industrial
company (defined as one that has incurred losses in consecutive
years and whose asset to liability ratio had fallen below 1.1)
is required to report its condition to the board. Alternatively,
banks and other financial institutions to which the company is
indebted may report such a company to the board. A stay or suspension
of actions against the property of the company takes immediate
effect. The board may then conduct an inquiry into the financial
position of the company to determine whether the company might,
in time, recover or benefit from a rehabilitation plan or be liquidated.
The board has wide powers to implement any such course of action
without requiring the consent or agreement of any creditors of
the company. It may also determine that a company should be liquidated
and refer the case to the relevant court for adjudication.
(c) Singapore
57. Liquidation and Scheme of Arrangement. The relevant
Singapore legislation on corporate insolvency is contained in
the Companies Act. In its original form it was and, in part, remains
similar to that of India and Pakistan. It provides for liquidation
and schemes of arrangement processes on which the same observations
as have been made in relation to India and Pakistan are also relevant.
58. Judicial Management. Singapore has largely abandoned
the scheme of arrangement process as its principal corporate reorganization
process. This was the result of some substantial reform to the
Companies Act in 1987 when a new corporate rescue process, known
as 'judicial management', was introduced. This has had some considerable
success and is widely regarded as a possible reform model for
countries in the region.
59. The judicial management process was introduced to overcome,
in part, the failings of the scheme of arrangement process. That
process was considered slow, cumbersome, expensive and generally
inefficient. It also did not provide for sufficient protection
for a company during the time that it might take to determine
if it might be restructured. The judicial management process allows
a company that is unable to pay its debts to apply for the appointment
of a judicial manager. The creditors of such a company may also
apply. The court may appoint a judicial manager who then manages
and controls the company to the exclusion of the directors. An
automatic stay of actions and proceedings against the company
operates. The judicial manager is then required to propose a plan
for the reorganization of the company. The plan must be approved
by a majority of the creditors.
(d) Hong Kong, China
60. Liquidation and Schemes of Arrangement. Corporate
insolvency law in Hong Kong, China is part of the Companies Ordinance,
1984. Again, the basic processes of liquidation and scheme of
arrangement are provided for in that legislation. The same observations
as above therefore apply. It is instructive that the number of
schemes of arrangement in Hong Kong, China are less than 2 per
year, a statistic that clearly shows the scheme of arrangement
process to be outdated and not suited to modern commercial needs.
61. Proposed 'Rescue' Reform. Recent proposals for corporate
insolvency law reform in Hong Kong, China may result in a form
of 'provisional supervision' reorganization process. The detail
of this is contained in the local study for Hong Kong, China.
It has some similarities to the judicial management process in
Singapore and to some other contemporary formal rescue processes
as found in such other countries such as Australia, England and
Canada. If this process is adopted it will provide Hong Kong,
China with a very advanced corporate insolvency rescue regime.
(e) Malaysia
62. Malaysia completes the survey of the economies that took
their basic corporate insolvency law from that of England. The
Malaysian version is contained in the Companies Act, 1965.
63. Liquidation and Schemes of Arrangement. Like Pakistan,
India, Hong Kong, China and Singapore, the Malaysian legislation
provides for liquidation and scheme of arrangement processes.
Like Pakistan, India and Hong Kong, China, Malaysia also still
struggles with the outdated 'scheme of arrangement' process. Despite
some endeavor of in Malaysia to encourage the development of a
new form of 'rescue' process (similar to that introduced in Singapore
and that proposed in Hong Kong, China), insolvency law reform
in Malaysia has not advanced. The effect of the economic crisis
on the local corporate sector has resulted in a number of companies
seeking protection under the scheme of arrangement process. Although,
in all the circumstances, it has operated tolerably well, some
judicial decisions have clearly compensated for shortcomings in
the law and procedure.
(ii) Category B: Civil (Japanese) Law Based RETA Economies
64. This next section considers three economies that share similar
civil and other law based insolvency law regimes. These have evolved
in the following circumstances. The corporate insolvency law regime
of Japan evidences two influences. The first, in the form of the
Bankruptcy Act 1922, which was derived from German law at the
time of the Meiji restoration in Japan in the latter part of the
19th century. The second, in the form of the Reorganization Act
1952, was taken from United States law.
65. These laws were subsequently applied in both Taipei,China
and Korea. The Japanese bankruptcy law of 1922 was used, in part,
as a model for the Bankruptcy Law 1935 of China and, although
subsequently repealed by the government of the People's Republic
of China in 1949, it remains the law in Taipei,China. The same
law was also applied to Korea. It remains as the Bankruptcy law
of 1962.
66. The Japanese reorganization law was used as a model for the
Reorganization Law, 1962 of Korea and to a lesser extent in Taipei,China
where it now forms part of the Company Law.
(a) Japan
67. Liquidation. This process is provided for in the Bankruptcy
Law, 1922. Although somewhat outdated, the law is, basically,
sound
68. Reorganization. Japan has three potential rescue processes.
The most commonly used are the corporate reorganization process
under the Corporate Reorganization Law and the composition under
the Composition Law. The third is the company arrangement process.
69. The company arrangement process involves an application to
a court to commence the process. This is generally accompanied
by an application for suspension of actions against both secured
and unsecured creditors. The directors continue to manage the
company under the supervision of the court. A plan of arrangement
is prepared and submitted to creditors for approval. It is a requirement
of this process that approval must be unanimous. If the plan is
not approved the corporation will be liquidated or the process
may be converted into the composition process.
70. The composition process requires that an application be made
to a court accompanied by a plan of composition. An investigator
is appointed to report to the court on the plan and the condition
of the corporation. Management continues as before. An application
may be made to stay or suspend actions, but only actions of unsecured
creditors. Unsecured creditors then consider the plan. Secured
creditors are not restrained nor affected by the process in any
way. Approval of a plan of composition requires a three quarter
majority vote in favor by all creditors and fifty per cent of
creditors present and voting at the meeting of creditors. It then
becomes binding on all unsecured creditors. Performance of the
plan is not, however, supervised. If the plan is not approved
the corporation is liquidated.
71. The main rescue process is corporate reorganization. It is
extremely involved and is said to be suitable for large public
companies only. The procedure requires the filing of an application
with a court. There is no automatic stay or suspension of actions
against the corporation. It is usual, therefore, that an application
for an interim stay has to be made to protect the property of
the company. An interim trustee is normally appointed at the same
time. It takes control of management of the corporation. The court
then undertakes a process of inquiry of the corporation; of major
creditors; of main shareholders, management and representatives
of employees of the corporation.
72. If the court is satisfied that the conditions necessary for
the commencement of the case are fulfilled, it issues an order
to that effect. It is only at this point that there is an automatic
permanent suspension of actions. The appointment of the trustee
is confirmed and the trustee continues to control the corporation.
An interim meeting of creditors occurs at which the trustee and
management give information concerning the corporation. The trustee
is required to prepare a plan of reorganization. This can take
up to two years. The plan is then submitted for consideration
by the creditors. There is a complicated voting requirement for
approval of the plan. In effect, this requires a majority vote
of two thirds of the unsecured creditors (in value), three quarter's
majority of secured creditors and a majority of shareholders.
The court must also sanction the plan. If the plan is not approved
the corporation will normally be liquidated.
73. Each of these procedures is independent of the other and,
although each is reasonably effective in its own right, it is
difficult to appreciate the need for such a variety of alternative
processes under separate forms of procedure.
(b) Korea
74. Liquidation. The Bankruptcy Act, 1962 provides for
the liquidation or bankruptcy of a corporation. It is basically
the same as the Japanese bankruptcy law.
75. Reorganization. The Composition Act, 1962 provides
for the possibility of a compromise of the debts of a corporation
and the Company Reorganization Act, 1962 provides for the possible
rehabilitation of a corporation. Only a debtor corporation can
file for a composition. The composition procedure is designed
for temporary relief. At the time of filing the debtor must propose
the terms of the composition and a plan to perform the composition.
A liquidation commissioner is appointed to review the corporation
and the proposal. The management of the corporation continues
in power. A meeting of creditors considers and votes for the approval
or otherwise of the composition. It appears that an agreement
must be reached for the debtor to perform its debt obligations
in full. If the composition is not approved, the corporation cannot
be transferred to a liquidation process.
76. The corporate reorganization process differs from the composition
procedure because it is aimed toward reorganizing or rebuilding
a debtor corporation. Under the reorganization process the company
makes an application to a court which then determines if the reorganization
should commence. During this process of consideration the court
can make interim orders and appointments to protect the property
of the company and place the management of the company in the
control of a receiver. If the court accepts the application a
permanent stay of actions takes effect and the court appoints
a permanent receiver, who effectively displaces management. A
timetable is set for the submission of a reorganization plan.
77. A reorganization plan is then submitted to the creditors
and must be approved by a complicated voting majority of creditors
of various classes. The court must then authorize the reorganization
plan to be implemented. The implementation of the plan is under
the control of the receiver.
78. Reforms. The insolvency law regime system is presently
under extensive review through the Ministry of Justice and the
International Bank for Reconstruction and Development. Major reforms
to the system are likely to result from this review.
(c) Taipei,China
79. Liquidation. The Bankruptcy Law, 1935 provides for
both liquidation (or bankruptcy) and for a composition.
80. Reorganization. The position is similar to that in
Korea and Japan. The reorganization process is only available
to a public company. The company must show that without reorganization
it would have to cease its business activities. The corporation,
shareholders or creditors may commence the process. The court
must decide to commence the reorganization process. If it does
the court appoints reorganizers who take control of the company.
A reorganization plan is submitted to a meeting of interested
parties which comprises secured creditors, unsecured creditors,
preferred creditors and shareholders. Approval of the plan is
required by both creditors and shareholders. If the reorganization
process breaks down or if a plan for reorganization is not approved
the court may order that the corporation be liquidated.
81. Only a debtor corporation may initiate a composition. A composition
plan is prepared which the creditors then consider. The corporation
continues under its own management, subject to supervision by
court appointed supervisors. A suspension applies to unsecured
creditors but not to secured or preferred creditors. Adoption
of the composition plan requires a majority vote of creditors
present who represent more than two thirds of the total unsecured
debts of the corporation. The composition must then be approved
by the court and is then implemented.
82. The reorganization regime, although it provides for basic
elements, is far from modern and has not been revised for some
considerable time. Like the reorganization regimes of both Japan
and Korea, it suffers from the fact that a large part of the procedure
is court controlled and driven.
(iii) Category C: Mixed Legal Heritage RETA Economies
The next section considers the insolvency regimes of the remaining
three economies, whose respective laws have been influenced from
different sources.
(a) Philippines
83. Liquidation. The Philippines has possibly the most
remarkable corporate insolvency law regime in the region. The
Insolvency Law, provides a liquidation (or 'insolvency') process.
However, this is rarely used.
84. Reorganization. The Insolvency Law also provides for
a form of 'rescue' process known as 'suspension of payments'.
It is only available to a corporation that has assets sufficient
to meet its debts (i.e. a company that is suffering from a temporary
liquidity problem). It requires an agreement to be made between
the corporation and its creditors for the eventual payment of
the debts in full. The suspension of payments process was regarded
as too restrictive and inflexible to enable more liberal forms
of corporate reorganization to occur. This led to demands for
a more liberal form of reorganization.
85. In 1976, a Presidential decree known as PD902A was declared.
Under its terms, jurisdiction regarding corporations that sought
the suspension of payments process was taken away from the regular
courts and given to the Securities and Exchange Commission (the
SEC). In addition, an alternative to suspension of payments was
introduced. This is known as 'rehabilitation'. It enables a corporation
whose assets do not exceed its liabilities to apply to the SEC
for the appointment of a rehabilitation receiver and/or management
committee and then to develop a rehabilitation plan.
86. This 'rehabilitation' process has become increasingly used
in the Philippines. There are few cases of suspension of payments
and practically no cases of insolvent liquidation under the basic
Insolvency Law. The rehabilitation process has functioned with
very few rules or guidelines, except as developed from time to
time by the SEC. A number of basic standards have been absent.
For example, the provisions of the decree relating to a stay or
suspension of actions against the corporation or its property
admit of no exceptions and may even operate so as to require all
creditors (secured and unsecured) to be treated the same. Further,
there has been no requirement that creditors should be consulted
regarding the approval or endorsement of a rehabilitation plan
nor that they should have any powers whatsoever in relation to
a rehabilitation plan. That part of the process has been solely
the province of the SEC, from which there is no appeal to a court.
87. Although the rehabilitation process has operated with some
apparent success, there has been a clear need to provide greater
transparency, predictability and fairness in the procedure. On
January 15, 2000, the SEC's newly enacted Rules of Procedure on
Corporate Recovery took effect. These provide for the following
important details:
· A set of rules governing the qualifications of persons who
may be appointed as a receiver or liquidator;
· The creation of classes of secured and unsecured creditors;
· Detailed time periods for various parts of the procedure;
· A clear statement of the functions and duties of a receiver
under the rehabilitation process;
· The creation, functions and duties of a management committee
comprised of secured and unsecured creditors and representatives
of the debtor; and
· Rules to govern the liquidation of a corporation in the event
that rehabilitation is not possible.
88. The SEC will continue to administer the rehabilitation process,
thus cementing the shift from what was once a judicial function
into a quasi-judicial or administrative process. This is unique
in the region.
(b) Indonesia
89. Liquidation. The corporate insolvency regime of Indonesia
is contained in the Bankruptcy Ordinance 1905. This law was taken
from Dutch law of the late 19th century. It provided for a liquidation
or bankruptcy process and a form of 'composition' or suspension
of payments process. It was outdated and rarely used. Following
the effect of the financial crisis some substantial reform was
made, in the form of a Government Regulation in lieu of Law, April
1998. This regulation is known as the Bankruptcy Regulations.
It came into force in August 1998. The regulations supplement
and amend the Bankruptcy Ordinance and substantially expand and
reform the suspension of payments process.
90. Reorganization. There are two "rescue" processes available
under the Insolvency Law of Indonesia. The first is commenced
by the debtor (or creditors) filing a petition for bankruptcy.
A stay or suspension of all actions takes effect for 90 days.
If, within that time, the debtor corporation presents a plan of
composition and creditors approve it, the plan takes effect. If
a plan is not proposed the debtor is liquidated.
91. The second process is commenced by a corporation filing a
request for suspension of payment of debts. This is then followed
by a temporary suspension of payments for a maximum period of
forty-five days during which time the proposal for the permanent
suspension of payments must be prepared for negotiation between
the debtor and the creditors. The affairs of the debtor corporation
are jointly managed by court appointed administrators and by the
debtor. If the proposal is presented within that time the court
may order a "permanent" stay which is effective for a period of
270 days. The plan must then be negotiated during that time. The
creditors vote on the proposal. If it is refused the court may
proceed with the liquidation of the debtor corporation.
(c) Thailand
92. Liquidation. The provisions for corporate insolvency
are contained in the Bankruptcy Act, 1940. This appears to have
been influenced by English bankruptcy law models. It contains,
for example, a series of 'presumptions of insolvency' that may
be likened to the English law concept of 'acts of bankruptcy'.
Prior to 1998, the Thai law contained a liquidation (or bankruptcy)
process and a composition process. There was no rescue or reorganization
process.
93. Reorganization. As a result of the economic crisis,
Thailand, like Indonesia, reformed the law by introducing a new
chapter on 'business reorganization'. This reform was made in
April 1998 and came into operation from August 1998. It applies
only to corporations, banks, security and insurance corporations.
A debtor corporation, a creditor of a debtor corporation or the
respective regulatory authorities of the banking, insurance and
securities sectors may make an application for business reorganization.
94. A request for reorganization is filed with the bankruptcy
court. It must determine whether or not to accept the request.
If the request is accepted, an immediate stay or suspension against
all actions and proceedings comes into force. A 'planner' is required
to be appointed who has the legal authority to manage the affairs
of the corporation. The 'planner' prepares a plan of reorganization.
The plan must be prepared within three months of the appointment
of the planner and forwarded to the official receiver and to all
creditors. A meeting of creditors is convened to discuss and approve
or disapprove the plan. The court must then approve the plan.
95. The application of both the bankruptcy process and the reorganization
process in Thailand has encountered some difficulties because
of the manner in which the threshold criterion of 'insolvency'
has been interpreted and applied. The only test of insolvency
under the Thai law is that the liabilities of the debtor exceed
the value of the assets of the debtor (sometimes loosely referred
to as a 'balance sheet' test). This has had the possibly unintended
result of severely restricting the availability of both the liquidation
and reorganization processes in Thailand.
96. However, as this report is about to go the press, the Bankruptcy
Court has just issued a landmark decision in the Thai Petrochemicals
Industry (TPI) case (March 15, 2000). The Court took the unprecedented
step of calculating the company's future cashflow and earnings
from selling assets and then converted these figures into present
values. Based on these figures, the Court ruled that TPI was unable
to service its debts, and found the company insolvent. This decision
marks the first time that the Court has used the 'cashflow' test
and it sets a precedent for the many debt restructuring cases
to follow.
III. ESTABLISHING GOOD PRACTICE STANDARDS
97. An evaluation of a formal corporate insolvency law regime
can be best approached by reference to comparative standards.
This part of the report identifies standards of a basic framework
for an acceptable corporate insolvency law regime.
98. Difficulties with Universal Concepts. Comparative
studies of the subject reveal considerable differences. The reason
for these differences can be due to a number of influences or
factors. They include the operative legal system tradition; the
inheritance of insolvency laws from different systems; the influence
of cultural attitudes, customs or traditions; differences in political
and economic policies; and practical and pragmatic factors (such
as the extent of development of the court system, the availability
of skilled professionals to conduct insolvency administrations
and so forth).
99. Established and Respected Principles. Despite these
differences, it is still possible to identify common basic policies
and principles of approach in the insolvency law regimes of countries
with different legal traditions and of different levels of economic
and industrial development. By carefully identifying and applying
these relatively common and consistent basic policies and principles
it is possible to reach well established, widely accepted and
respected standards that survive most tests of relevance, suitability
and practicality.
100. Global Corporate Environment. There is also some
commercial validity or justification to that approach. The corporate
environment in which most corporate insolvency law regimes are
expected to operate are relatively similar. Such regimes are primarily
directed at corporations that are involved in private enterprise
trade and commerce. There are a number of common, almost universal,
elements associated with the creation and operation of corporations
which suggest that laws concerning their financial stability and
viability should be similar or should contain common identifiable
basic elements.
101. Economic Expectations and Commercial Needs. It is
also useful and relevant to consider what might be best described
as economic expectations and commercial needs. These have real
significance for corporate insolvency procedures and techniques.
These expectations and needs fashion many of the goals and the
means to be employed to attain them. The appropriate role of the
law is to enable the goals to be reached and to provide mechanisms
to enable the means to be employed. This also assists in the identification
and development of appropriate standards.
102. These expectations and needs may be described as follows:
· First, an insolvency law may be expected to serve the micro
economic process. Thus, an insolvency law should respond to
the economic need to possibly remove uncompetitive or loss making
enterprises from the market place. This requires a liquidation
or bankruptcy process. It should also respond to the economic
need to maximize the value of the enterprise and to lessen the
effects of a possible liquidation. This requires a form of rescue
or reorganization process.
· Secondly, an insolvency law may be expected to serve the
expectations or needs of the commercial community. The more
major of these happen to accord with the economic needs, though
perhaps for different reasons. Thus, there is a need for a liquidation
process not only to clear away uncompetitive businesses from
the market place but also to enable creditors, particularly
unsecured creditors, to exercise an ultimate creditor enforcement
right. Secondly, there is a need for a rescue process to afford
corporate debtors and their creditors the opportunity of determining
upon a form of administration that may provide greater value
for them. Thirdly, there is a need to provide some positive
motivation toward initiating the rescue process. This can come
from the background presence of a liquidation process.
Related to these are other commercial needs, such as:
- a need for certainty or predictability in commercial affairs.
This requires that the law clearly provide for a resolution
of the affairs of a corporation that is insolvent or in financial
difficulty. It also requires that the law clearly provide for
the respective rights of persons having an interest in the resolution
of the affairs of the debtor - creditors, shareholders, management,
employees, government and so forth.
- a need for sensible commercial stability and order. This suggests
that the law should protect the property of an insolvent corporation;
protect creditors between themselves; and otherwise ensure an
ordered progression of the administration of the insolvent corporation.
- a need for commercial efficiency. The law must be capable
of responding quickly and definitively to the problems inherent
in dealing with the affairs of a corporation that is insolvent
or in financial difficulty.
- a need for fair commercial or equitable treatment. This demands
that the law, above all, manifest itself as a collective or
communal process.
- a need for transparency. This largely translates into affording
proper information and involvement in decision making to those
most affected by the insolvency. This is particularly important
in the rescue process.
· Thirdly, there is the possibility of serving other expectations.
One such expectation is in the area of labor and social services.
Loss of employment is usually a certain consequence of the liquidation
of an insolvent corporation. An efficient rescue process can
help to lessen the incidence of unemployment. Another expectation
may be to relate to the wider 'commercial' morality, which raises
issues about the need to enforce appropriate standards of corporate
governance and responsibility. Insolvency laws and processes
can, in part, respond to that need by providing for investigation
and reporting on the management and conduct of an insolvent
corporation.
103. Development of Insolvency Law Standards. The ADB
has been joined in the development of standards by other multi-lateral
agencies. Following the publication of the First Comparative Report
(in which standards were proposed for discussion at the January
Symposium), both the IMF and the World Bank have developed good
practice principles. [4]
104. It should also be noted that the standards identified and
advanced as part of this RETA, together with those of the IMF,
have been used by UNCITRAL in considering the possibility of developing
key objectives, core features and legislative guidelines for a
strong insolvency, debtor-creditor regime (see UNCITRAL A/CN.9/WG.V/WP.50,
20 September 1999 on UNICTRAL's website www.uncitral.org).
105. The good practice elements are identified in the material
that follows as the respective relevant corporate insolvency laws
of the RETA economies are examined. This examination and assessment
is based on critical analyses contained in the local studies and
assessment and evaluation as a result of the comparative reports
and a consideration at the symposiums. The aim of this part is
to identify areas of the insolvency law regimes that clearly merit
attention, and to signal problem areas that may be capable of
being addressed by further study, analysis and assistance.
IV. APPLICATION OF THE GOOD PRACTICE STANDARDS
106. This section identifies the areas in which some basic standards
should apply and relates these to an assessment of the corporate
insolvency regimes of each of the RETA economies. These standards
are not intended to be exhaustive. They cover only the more essential
areas that may be considered critical to debtor-creditor relationships
in a corporate insolvency environment.
A. Distinguishing between Individual and Corporate Insolvency
107. This involves a consideration of to whom the law should
apply. The first issue is whether the law should distinguish between
individual debtors and corporate debtors. It is highly probable
that different policy considerations and different social and
other attitudes will be relevant to each of these areas. Policies
toward individual or personal debt or insolvency will often evidence
cultural attitudes that are not as relevant to corporate or commercial
insolvency. Some examples are found in attitudes toward the incurring
of personal debt; the effect of bankruptcy upon the status of
individuals; attitudes toward providing relief for unmanageable
personal debt; and providing for discharge from insolvency or
bankruptcy.
108. By comparison, the policies that are likely to be applicable
to corporate insolvency will be based on economic and commercial
considerations. These should usually reflect the vital part that
corporations play in a market economy and that insolvency procedures
and techniques affecting corporations should largely reflect economic
expectations and commercial needs, as mentioned earlier. These
will not normally be relevant to individual insolvency.
109. It is, therefore, advisable to either apply separate insolvency
laws to individuals and corporations or, in the case of a single
insolvency law, to clearly distinguish between them in that law.
Some features might be common to both (for example, dealing with
claims of creditors; priorities between creditors and so forth),
but it may be necessary to have distinctly different provisions
regarding important elements, such as threshold entry requirements.
110. A further consideration is under what branch (personal or
corporate) should individual or personal business activities (including
unincorporated partnerships of individuals) fall. The precedents
from the experience of many countries suggest that, although individual
business activities form part of commercial activity, such cases
are best dealt with under the regime for individual insolvency
because, ultimately, the proprietor/s of an unincorporated business
are personally liable without limitation for the liabilities of
the business.
