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:

 

    1. Study the relationship between corporate debt and the insolvency or financial difficulty of corporate debtors in the region;
    2. Make recommendations that are suitable for the region to effectively deal with a problem of corporate insolvency and recovery of debt; and
    3. Make available through the Internet, the insolvency and other related legislation of the RETA economies and the studies and reports produced as a result of the project.

 

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:

 

  • 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

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.

 

  • Corruption, bribery and fraud

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.

 

  • 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 'globalisation  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.

 

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:

 

  • Local Studies of Insolvency Law Regimes
  1. A list of local studies of the eleven economies from Phase I of the project (Hong Kong, China, India, Indonesia, Japan, Korea, Malaysia, Pakistan, Philippines, Singapore, Taipei,China, and Thailand) can be viewed on-line or downloaded.

     

  2. A list of local studies of five of the eleven economies from Phase II of the project (Indonesia, Korea, Malaysia, Philippines, and Thailand), case studies and information on secured transactions can be viewed on-line or downloaded.

 

  • Comparative Studies

 

The following reports are available for on-line viewing or downloading:

 

  1. A Preliminary Comparative Report for Phase I of the project that covered the eleven economies.

     

  2. A Supplementary Comparative Report for Phase II of the project that covered five of the eleven economies.

     

  3. A Final Report on the entire project.

 

  • Relevant Local Legislation:

 

Insolvency Laws and Insolvency Related Laws used in the various economies studied can be viewed on-line or downloaded (limited to the availability of legislation).

 

At this time, we have been unable to obtain relevant legislation in soft copy from Japan, Malaysia, Pakistan, the Philippines, and Taipei,China.

 

  • News and Current Issues:

 

News items to keep browsers informed on current insolvency development and issues in Asia are displayed.

 

  • Forum:

 

Questions asked by the browsers will be forwarded to the Forum Resource Persons by e-mail.

 

The Forum Resource Persons will be selected volunteers who have an interest in the particular area of discussion.

 

All answers will be posted onto the forum.

 

All of the above processes will be done automatically. As soon as the Forum Resource Persons reply to the questions, the responses will be published onto the web site.

 

  • Consultants/Professional Organisations/Legal Resource Sites/Regulators

 

The contact details of the Lead and Local Consultants are listed together with contact details of Professional Organisations and Legal Resource Sites which may be helpful, and the contact details of Regulators in those economies.

 

The features of the website are:

 

  • An Introduction to this project;

 

  • A simplified version of the web site without any animated graphics to reduce the access time for users that possess a less powerful Internet connection;

 

  • Conversion of the Local Studies and the Comparative Reports to Acrobat format for easy downloading;

 

  • Links to relevant web sites are provided;

 

  • Key words search is available for users to locate their desired topics; and

 

  • Access to the search engine of the Project DIAL web site.

 

 

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

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 which 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.

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 which 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 which 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 an insolvency law regime.

(b) Rescue

An explanation of the term "rescue" is desirable. In the context of this report it 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. A rescue might also take the form of a complex reorganisation 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.

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.

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.

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.

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 which 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.

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 favour 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.

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.

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.

(c) Special insolvency laws

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.

 

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:

 

  • 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 reorganisation 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.

 

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:

 

  • 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.

 

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:

 

  • 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 maximise the value of the enterprise and to lessen the effects of a possible liquidation. This requires a form of rescue or reorganisation 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 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:

 

  • the Group of 22 Report, Report Of The Working Group On International Financial Crises , published October 1998;

 

  • a report of the International Monetary Fund, Orderly and Effective Insolvency Procedures: Key Issues , published May 1999;

 

  • a report on Latin American Insolvency Systems, World Bank technical paper No. 433, published April 1999; and

 

  • a background paper of the World Bank, Building Effective Insolvency Systems: Toward Principles and Guidelines , published February 2000.

 

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.

 

  1. APPLICATION AND SCOPE - Distinguishing between individual and corporate insolvency.

 

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.

 

 

Economy

A = Applied
P = Applied in part
N = Not Applied

Pakistan

A

India

A

Singapore

A

Malaysia

A

Hong Kong, China

A

Japan

N

Korea

N

Taipei,China

N

Thailand

N

Indonesia

N

Philippines

N

 

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.

 

Economy

A = Applied
P = Applied in part
N = Not Applied

Pakistan

A

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