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ASIAN DEVELOPMENT BANK REGIONAL TECHNICAL ASSISTANCE TA NO: 5795-REG INSOLVENCY LAW REFORM IN THE ASIAN REGION A REPORT ON THE RESULTS OF THE TECHNICAL ASSISTANCE
PART 1 INTRODUCTION 1.1 A time of insolvency law revolution The subject of insolvency law rarely attracts much
more than a fleeting or passing interest. It ranks low on political
agendas and in the business of governments. The commercial community,
though sometimes aroused, is 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. 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 there was a sudden crash. Stock and property values declined sharply. Many corporations had borrowed extensively during the boom years. The crash resulted in widespread corporate collapse. This produced in some intensive endeavours at a national level to develop or further develop corporate rescue and associated informal insolvency techniques in many of the economies affected by the recession. It also led to the most concerted endeavours yet undertaken to provide regional and global foundations to take account of cases of cross-border corporate insolvency. 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. 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 endeavours 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. 1.2 The relationship of insolvency law systems to economic development and stability 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. 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 realisation that trade and commercial development is at the heart of economic development has led to endeavours 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. The 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. Since October 1998 the Asian Development Bank has been extensively involved in insolvency and related law development in the Asian region. This report is about that involvement. It presents the results of a technical assistance in relation to the corporate insolvency laws and practices of eleven Asian economies. Also, and very importantly, it merges with another Asian Development Bank technical assistance program concerning secured transaction law reform in the Asian region. 1.3 The recent development of insolvency and related law reform in the Asian region. Pre financial crisis Before the onset of the Asian financial crisis, the insolvency laws and practices of many of the economies were rarely applied. In many cases the insolvency laws had been imported from overseas jurisdictions. They were old laws that had never been reviewed. Such statistics as are available indicate that in many of the economies there had been no cases of corporate bankruptcy at all. The insolvency law systems were, generally speaking, out of date and irrelevant to modern commercial needs. 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. 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 modernise those laws and the institutional capacity to apply them. Post financial crisis The onset of the financial crisis changed all that. It produced an environment in which insolvency and related law reform became an important part of government agendas. Law and practices relating to debt funding, debt recovery, secured transactions and formal insolvency processes were subjected to critical scrutiny and review. When this technical assistance commenced in October 1998, a process of law and commercial reform was underway in many of the economies that were most effected by the crisis. New corporate reorganisation chapters of the insolvency laws of Indonesia and Thailand were enacted. Proposals for corporate insolvency law reform in Hong Kong, China were advanced. Six of the economies commenced the promotion of informal corporate workout processes. 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 has been established. It has jurisdiction in bankruptcy. 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 reorganisation procedures has recently been announced. Korea has commenced a total review and reform of its insolvency law system. Japan is actively pursuing reforms to 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. In some of the economies attention has been given to corporate governance and related issues. Endeavours are being made to improve corporate accounting and reporting standards. In economies that were hardest hit by the financial crisis, the banking and financial sectors have been the subject of extensive investigation, rearrangement and reform. This considerable range of legal reform and development evidences that many of the issues upon which this technical assistance has focused have been treated seriously and that governments have responded positively and responsibly. 1.4 The future 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 economies the institutional capacity, particularly of the courts and government agencies, to apply the insolvency laws requires considerable expansion and improvement. In a number of the 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. 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 undermines the effect of even the most advanced forms of corporate insolvency law regimes. The region as a whole also requires endeavours to promote regional and country specific co-operation in cases of cross-border insolvency. Finally, knowledge and experience to deal with corporate reorganisation, in both formal and informal processes, is required at a number of levels. This requires continued and long-term education and training programmes. PART 2 THE ORIGINS, SCOPE, METHODOLOGY AND DEVELOPMENT OF THE TECHNICAL ASSISTANCE
2.1 ORIGINS Law and development work at the Asian Development Bank A principal focus of the work of the Asian Development Bank has been on law and associated development in the member countries of the Bank. In this context the Bank has, for example, completed a study on the role of law and economic development in Asian economic development. It has also focused on human resource development in the legal and judicial sector and has addressed the need for systemic law reform in some of the developing member countries of the Bank. Effect of the Asian financial crisis The advent of the Asian financial crisis (often identified in point of time by the devaluation of the Thai currency in July 1997) caused the activities of the Bank in the area of law and development to take on a new dimension. Legal and regulatory reforms became a central element in the response of the countries most affected by the crisis. This technical assistance was conceived as a most necessary part of the response of the Bank to the crisis. It was one of 59 technical assistance projects provided by the Bank in 1998 in the Asian region. Why insolvency laws? Insolvency law regimes were chosen as the subject of one of these projects because the financial crisis had exposed the failings of insolvency regimes in many of the Bank's developing member countries ( 'DMC's). 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 economies was to be restored. Why regional technical assistance Technical assistance projects are either country specific or regional. This technical assistance was, necessarily, regional to enable account to be taken of the insolvency law regimes in the Bank's developing member countries affected by the crisis. The aim 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. Selection of economies Eleven economies were selected for the initial study. Among the economies most affected by the crisis were Indonesia, Thailand, Korea, Malaysia and Japan. Less affected were the Philippines, Pakistan, India, Singapore, Hong Kong, China and Taipei,China. These eleven economies are collectively referred to in this report as the 'RETA economies'. Two of those economies (Singapore and Hong Kong, China) were included, in particular, for regional comparative purposes. The comparative approach was important for another reason. It opened the way to explore not only regional but also international best practice.
Aims of the technical assistance
The purpose 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 technical assistance 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:
Technical assistance on secured transactions reform
Another regional technical assistance project of the Bank, (RETA No. 5773 Secured Transactions Law Reform), has assumed a complimentary importance to this technical assistance. As mentioned later, this is because of the critical inter-relationship between a secured transactions legal regime and a corporate insolvency law regime.
2.2 SCOPE OF THE WORK
An insolvency law regime cannot function as an island. It is but part of an overall system of law and the economic, commercial and social environment in which that system functions. It also 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. An insolvency law will normally both influence and be influenced by a large number of economic, legal, commercial, social and cultural considerations. This technical assistance was designed accordingly. The discovery process commenced by enquiring into and addressing background areas. These areas included the following:
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.
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.
This examined influences relevant to commercial culture and attitudes, in particular attitudes toward formal legal processes, the utilisation 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.
Although this is a sensitive area, it must be explored and exposed to determine the influence 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.
An examination of the legal system generally, its origins and the influence of foreign based laws and institutions, attitudes toward and the extent of 'globalisation of legal processes and commercial practices.
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.
An examination of the extent of credit trading and the recovery and enforcement of unsecured debt.
2.3 METHODOLOGY
Project officer and International consultants The project was directed by Ms Clare Wee of the Office of General Counsel of the Bank and conducted by two international consultants under the supervision of the project officer of the Bank. The international consultants were Mr Ronald Harmer and Mr John Lees. Work on the project commenced in October 1998.
Local consultants Local expert consultants were engaged from each of the RETA economies to work in conjunction with local representatives from government, the financial sector, professionals and academics. A list of the local consultants is appended.
Work coverage A work guide composed of some twenty sections of enquiry was prepared for the guidance of the local consultants. The sections of enquiry included forms and structures of business organisations; 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.
Local studies Individual studies for each of the RETA economies were prepared by the local consultants (the local studies ) based on the work guide. The local consultants also made available copies of insolvency and other relevant legislation together with copies of guidelines for the operation of informal insolvency techniques.
First Comparative report A Comparative Report (the First Comparative Report ) was prepared by the international consultants. It, together with the local studies, were reviewed and discussed at a symposium held at the headquarters of the Bank from 25-26 January 1999 (the first Symposium ).
First symposium The RETA economies were represented at the symposium by the local consultants, judges, government officials and policy makers, lawyers, accountants, insolvency practitioners, bankers and scholars. Also present were observers from other multilateral institutions, including the World Bank ( WB ), International Monetary Fund ( IMF ), United States Agency for International Development ( USAID ) and the Organisation for Economic Co-operation and Development ( OECD ), together with delegates from various legal institutes, the People s Republic of China and the Socialist Republic of Vietnam.
ADB report A summary of the results of the first Symposium and the work of the RETA to that point in time was prepared and published by the Bank under the title Insolvency Law Reform in the Asian and Pacific Region in Law and Development at the Asian Development Bank, April 1999 (the ADB report ).
Further development of project The second phase of the project 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 the relatively short period of nine months since the date of the first Symposium.
Supplementary local studies The local consultants in the five 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 reorganisations; the availability and quality of information and statistics relating to corporate insolvency; and actual or proposed reforms to the insolvency law.
Supplementary comparative report Based on the supplementary studies and field visits to the five economies involved, a further comparative report was prepared which critically analysed the above areas and proposed recommendations for reform and further development.
Second symposium A further symposium was conducted at the headquarters of the Bank in Manila from 25-27 October 1999. This was combined, in part, with another symposium at the Bank on secured transactions reform. This was a unique opportunity for a significant discussion of issues arising from the intersection of corporate debt financing, secured transaction financing and corporate insolvency. The two symposiums were attended by representatives from the five economies involved in the insolvency law project and the economies engaged in the secured transactions project.
Internet The product of the work produced by this technical assistance has been developed into a dedicated web site, accessible on the Internet address, http://www.insolvencyasia.com/. The material covered on this site includes the following:
The following reports are available for on-line viewing or downloading:
The features of the website are:
2.4 RESULTS AND FINDINGS
The results of the technical assistance are presented under the following further parts.
Part 3. Features of a corporate insolvency law system and review of such regimes in the RETA economies. This part reviews the insolvency laws of the eleven RETA economies in general.
Part 4. Development of best practice standards. This part surveys the considerations of which account should be taken in the development of a set of best practice standards that provide a basic framework for a modern corporate insolvency law regime.
Part 5. Statement and review of application of the standards in the RETA economies. This part sets out the standards and reviews their application in the corporate insolvency law regimes of the RETA economies.
Part 6. Summary and review of application. The review suggests that in some critical areas the insolvency laws and practices of many of the RETA economies are defective and need reform.
Part 7. Informal corporate insolvency work-out processes. In this part the origins and development of this type of process in the Asian region is examined. This is an important area because, as will appear from the report, informal processes seem better suited to the commercial culture of the region. The development has been successful and needs to be encouraged.
Part 8. Application of the insolvency law regimes. This part covers areas such as the role of courts and administrative agencies. Although these are external to the actual framework and content of an insolvency law, they are vital for the efficient and just operation of such a law.
Part 9. Other external matters affecting the operation of insolvency law regimes. This covers other external matters that, although less closely related to an insolvency law, are important as part of a more general scheme of commercial and corporate regulation and behaviour. This part includes areas such as cultural attitudes. commercial and corporate practices, corporate governance, corruption, political and government patrimony and the banking and financial system.
Part 10. The intersection between secured transactions and insolvency. This part presents a separate report on the very important relationship of secured transactions and insolvency. It surveys the areas covered in the joint session conducted as part of the insolvency law technical assistance and the secured transactions technical assistance.
Part 11. Summary and conclusions This final part provides an overall summary of the conclusions reached under the technical assistance and suggests recommendations for important future work.
PART 3
FEATURES OF A FORMAL CORPORATE INSOLVENCY LAW REGIME AND REVEIW OF THOSE REGIMES IN THE RETA ECONOMIES
This part 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.
3.1 The basic elements of a formal corporate insolvency law regime 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 endeavour 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. The range of interests which need to be accommodated for by an insolvency law include the insolvent debtor itself; 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.
3.2 Corporate insolvency law regimes generally 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 which provide for particular circumstances might also form part of the regime. (a) Liquidation
(b) Rescue
(c) Special insolvency laws
3.3. Initial comparison of the corporate insolvency laws of the RETA economies
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:
The laws of the economies in each of these three categories are now briefly examined.
3.4 CATEGORY A THE ECONOMIES WHOSE CORPORATE INSOLVENCY LAWS ARE ENGLISH LAW BASED
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.
3.4.1 PAKISTAN
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.
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 modernised and improved.
Reorganisation process. The reorganisation part of the Companies Ordinance provides for a form of reorganisation known as a scheme of arrangement . This part of the law is outdated. It meets only a few of the best practices standards. Such statistics as are available in Pakistan reveal no recent use whatsoever of the reorganisation 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.
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 modelled 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.
Despite 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 enquiry, 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.
3.4.2 INDIA
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.
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 enquiry 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.
3.4.3 SINGAPORE
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.
Judicial management. Singapore has largely abandoned the scheme of arrangement process as its principal corporate reorganisation 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.
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 enables 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 reorganisation of the company. The plan must be approved by a majority of the creditors.
3.4.4 HONG KONG, CHINA
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.
Proposed rescue reform. Recent proposals for corporate insolvency law reform in Hong Kong, China may result in a form of provisional supervision reorganisation 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.
3.4.5 MALAYSIA
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.
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 endeavour 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.
3.5 CATEGORY B - CIVIL LAW (Japanese law based) ECONOMIES
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, 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 Reorganisation Act 1952, was taken from United States law.
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 1962.
The Japanese reorganisation law was used as a model for the Reorganisation Law,1962 of Korea and to a lesser extent in Taipei,China where it now forms part of the Company Law.
3.5.1 JAPAN
The corporate insolvency regime is contained in a series of laws.
Liquidation. This process is provided for in the Bankruptcy Law, 1922. Although somewhat outdated, the law is, basically, sound
Reorganisation. Japan has three potential rescue processes. The most commonly used are the corporate reorganisation process under the Corporate Reorganisation Law and the composition under the Composition Law. The third is the company arrangement process.
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.
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 favour 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.
The main rescue process is corporate reorganisation. 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.
If the court is satisfied that the conditions necessary for the commencement of the case are satisfied, 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 reorganisation. 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.
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.
3.5.2 KOREA
Liquidation. The Bankruptcy Act, 1962 provides for the liquidation or bankruptcy of a corporation. It is basically the same as the Japanese bankruptcy law.
Reorganisation. The Composition Act, 1962 provides for the possibility of a compromise of the debts of a corporation and the Company Reorganisation Act, 1962 provides for the possible rehabilitation of a corporation.
A composition is governed by the Composition Act. 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.
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.
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.
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.
3.5.4 TAIPEI,CHINA
Liquidation. The Bankruptcy Law, 1935 provides for both liquidation (or bankruptcy) and for a composition.
Reorganisation. The position is similar to that in Korea and Japan. The reorganisation process is only available to a public company. The company must show that without reorganisation it would have to cease its business activities. The corporation, shareholders or creditors may commence the process. The court must decide to commence the reorganisation process. If it does the court appoints reorganisers who take control of the company. A reorganisation 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 reorganisation process breaks down or if a plan for reorganisation is not approved the court may order that the corporation be liquidated.
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.
The reorganisation regime, although it provides for basic elements, is far from modern and has not been revised for some considerable time. Like the reorganisation regimes of both Japan and Korea, it suffers from the fact that a large part of the procedure is court controlled and driven.
3.6 CATEGORY C - MIXED LEGAL HERITAGE ECONOMIES
The next section considers the insolvency regimes of the remaining three economies, whose respective laws have been influenced from different sources.
3.6.1 PHILIPPINES
The Philippines has possibly the most remarkable corporate insolvency law regime in the region.
Liquidation. The Insolvency Law, provides a liquidation (or insolvency ) process. However, this is rarely used.
Reorganisation. 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 reorganisation to occur. This led to demands for a more liberal form of reorganisation.
In 1976 a Presidential decree known as PD902A and 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.
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.
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.
The SEC has now published a set of regulations to govern the procedure. These provide for the following important details:
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.
3.6.2 INDONESIA
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.
The regulations substantially expanded and reformed the suspension of payments process.
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.
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.
3.6.3 THAILAND
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 reorganisation process.
As a result of the economic crisis, Thailand, like Indonesia, reformed the law by introducing a new chapter on business reorganisation . This reform was made in April 1998 and operated from August 1998. It applies only to corporations.
The rescue process of Thailand now appears in the Bankruptcy Act. It applies not only to corporations but also to bank, 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 reorganisation either.
A request for reorganisation 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 reorganisation. 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.
The application of both the bankruptcy process and the reorganisation 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 reorganisation processes in Thailand. PART 4
ESTABLISHING A SET OF BEST PRACTICE STANDARDS
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.
4.1 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).
4.2 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.
4.3 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.
4.4 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.
These expectations and needs may be described as follows:
Related to these are other commercial needs, such as:
Thirdly, there is the possibility of serving other expectations. One such expectation is in the area of labour 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.
4.5 Development of insolvency law standards. The Asian Development Bank has been joined in the development of standards by other multi-lateral agencies. Following the publication of the first comparative report in this technical assistance (in which standards were proposed for discussion and debate in the First Symposium), both the International Monetary Fund and the World Bank have developed best practice principles. The writings have become extensive. Mentioned in this context are:
It should also be noted that the standards identified and advanced as part of this technical assistance, 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.
The best 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 reports 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.
PART 5
APPLICATION OF THE BEST PRACTICE STANDARDS
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 eleven 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.
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.
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.
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.
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.
Best Practice Standard 1
An insolvency law regime should clearly distinguish between, on the one hand, personal or individual bankruptcy and, on the other, corporate bankruptcy
Application of Standard 1 to the insolvency laws of the RETA economies.
COMMENT The five economies whose insolvency law regimes have been derived from English law models make a clear distinction between personal and corporate bankruptcy.
In the bankruptcy laws of Thailand, Indonesia, Japan, Korea, Taipei,China and Philippines there is no or not sufficient distinction between corporate bankruptcy and personal bankruptcy.
Difficulties have already occurred in the application of the law in Thailand in relation to this issue. Conservative and restrictive policies and attitudes toward individual insolvency have affected the interpretation and application of the bankruptcy law. For example, the criterion for the commencement of bankruptcy proceedings has been narrowly interpreted and is difficult to establish. This has affected the application of the law in relation to corporate insolvency. It has become difficult for both creditors and debtors to commence corporate reorganisation proceedings. This demonstrates a possible unintended consequence of not providing sufficient distinction between individual and corporate insolvency processes.
It is recommended that the laws in the six economies should be revised to make a clear distinction between personal and corporate bankruptcy. As mentioned, this does not necessarily require separate laws but it may require separate chapters of an insolvency law.
2. APPLICATION AND SCOPE coverage of all corporations Principle suggests that the liquidation and rescue processes of an insolvency law regime should apply to all forms of corporation, both private corporations and state-owned. It may be necessary or desirable to separate out corporations which are engaged in some particular enterprises. For example, the insolvency of banking and insurance corporations should normally be governed by special insolvency legislation or be subject to special rules of the insolvency law. Very few, if any, jurisdictions would permit a banking corporation (whether private or state owned) to be subject to a basic corporate insolvency law without some involvement of regulatory bodies. Principle also dictates that state owned corporations (other than banks) which compete in a market economy should be subject to the same commercial and economic processes as privately owned corporations, including the basic insolvency law. While it can be argued that state owned corporations in a transitional economy might be best dealt with by special insolvency processes, under normal market economy conditions they should not be afforded different treatment than that which applies to private corporations.
Best Practice Standard 2
All corporations, both private or state-owned (with the possible exception of banking and insurance corporations), should be subject to the same insolvency law regime.
Application of Standard 2 to the insolvency laws of the RETA economies.
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