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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.
COMMENT
There is a general application of this standard in all of the economies.
There are some specific exceptions. The corporate insolvency laws of Indonesia, Singapore and Malaysia also provide for the possible liquidation or bankruptcy of a banking corporation. However, this may only be initiated on the application or with the authority of a responsible controlling authority and does not appear to present any real problem.
It should be noted that, in relation to India and Pakistan, their respective special laws for sick company processes (mentioned earlier) fail several of the best practice standards, particularly those relating to transparency, involvement of creditors and general collective fairness. They are examples of extra-judicial processes designed to assist in micro economic reform of state controlled industrial units or of industries that are considered important to a national economy. They should thus be viewed as special processes, outside of the traditional forms of insolvency process remedies, and should be evaluated according to the respective economic and other policy dictates of those economies. They provide possible models for adoption toward; for example, state owned enterprises in emerging economies and economies in transition.
This involves a fundamental policy issue concerning the framework of the law.
The law should provide for a liquidation process and a reorganisation or rescue process. The issue is whether to create a strict division between the two; create a division but enable conversion from one process to the other; or provide for both processes to be accessed under a single procedure.
The first of these options creates an undesirable degree of polarisation and also results in delay, increased expense and inefficiency. It means, for example, that if an attempt at reorganisation fails, a new and separate procedure for liquidation must be commenced.
The second and third options involve a "unitary" system that might be modelled on one of two alternative designs:
The first is a pure unitary system in which there would be one only point of entry with the ultimate process (either liquidation or rescue) to be determined at a later point in time. The second is a modified unitary system that provides a choice of one of two separate entries, one entry for liquidation and another entry for rescue, with provision for possible conversion from one to the other.
Either of these is acceptable. Each presents a one law, two systems approach.
Employing either approach would mean that:
Graphic A (see appendix to this report) shows a broad overall plan of how the modified unitary approach might operate. It shows two points in the process at which there should be provision for transmission from rescue to liquidation mode. These are when creditors reject a rescue proposal or if the rescue plan cannot be effected.
This unitary (or modified unitary) approach produces a desirable amount of flexibility, choice and freedom. It avoids the need for multiple laws and the possible confusion, inefficiency and expense that can be associated with that. It can accommodate multi-chapter corporate insolvency laws because it enables the administration of an insolvent corporation to be processed with flexibility (to convert from one possible solution to another) with efficiency and without significant expense or disruption. But, above all, it is safe and provides desirable protection to creditors in particular because once the corporation is subject to the law, it cannot exit from the system without some ultimate determination of its fate. That would also seem to make commercial sense.
Best Practice Standard 3
The optimum design of a corporate insolvency law regime should incorporate both liquidation and rescue processes by a one law, two system convertible design. This may be either a pure unitary or modified unitary design. In a modified unitary system the law should provide, in particular for conversion from the reorganisation process to the liquidation process.
Application of Standard 3 to the insolvency laws of the RETA economies.
COMMENT
Only a limited number of the regimes apply this standard. None of the economies that have adopted English based law insolvency laws follow a unitary design and, consequently, do not provide for conversion from reorganisation to liquidation. This includes Singapore, which may appear somewhat surprising considering that its judicial management regime is of comparatively recent origin.
Thailand has a provision for conversion, but it is of very limited scope.
Indonesia, Japan, Korea and Taipei,China follow a modified unitary approach by providing for a conversion from reorganisation to liquidation..
Only the Philippines has something approaching a pure unitary system. Under the new rules of the SEC regarding reorganisation, if a corporation fails to have a plan approved the SEC may order the liquidation of the corporation.
It is suggested that the economies with non-unitary systems should consider the adoption of a unitary based insolvency law system.
Policy considerations suggest that access to the process (either or both of liquidation and reorganization) should be convenient, inexpensive and quick. If access is too restrictive it can deter both debtors and creditors. Delay can result in insolvent corporations, which should be liquidated, being left uncontrolled with the likely dissipation of assets. Restricted access can be particularly harmful to the possibility of rescue. However, if it is too unrestricted there is a possibility of the process being abused, particularly by creditors. The preferred policy is to make access easy for a debtor corporation by requiring simple threshold proof of the basic criteria of insolvency . The concept of insolvency has been much discussed and debated. However, it should, by now, be widely accepted that the most simple and safe exposition is that a debtor is in a state of insolvency when the debtor is not able to pay a mature (due) debt. This is what is generally known as cash flow or commercial insolvency. The other test, commonly known as the "balance sheet" test, requires that debts or liabilities exceed value of assets.
From a procedural aspect, the debtor itself will know when this position has been reached and it should not be necessary to require other than a simple declaration to that effect by the debtor, through its directors or board of management, as evidence that it is insolvent. From the perspective of a creditor, the standard of insolvency needs some pragmatic procedural refinement to establish a threshold test of evidence or proof. A reasonably convenient and objective test is the failure of a debtor to pay a debt within a specified period of time after a written demand for payment has been made
For reorganisation cases it is essential that the law give the utmost encouragement to enable a corporation that is in financial difficulty or insolvent to voluntarily submit itself to the process. Although the power to initiate the rescue process may be given to creditors as well, the reality is that in almost all cases the debtor alone will initiate the process. This is where the most attention must be centred.
In a voluntary reorganisation case, a lesser standard, might also apply that of financial difficulty . This might be best described as a state of financial affairs which, if not dealt with, will almost certainly result in a state of insolvency
It is sometimes suggested that the application of such a lesser standard could result in the process being abused by a debtor corporation (to prevaricate and deprive creditors of prompt payment of debts in full). That, it is suggested, is highly improbable. In the unlikely case that such an event might occur, the remedy is for the law to provide for the relevant court or tribunal to declare that the debtor is no longer subject to the application of the insolvency law.
If the law is a modified unitary design, attention should also be given to the possibility of access by a debtor through conversion from the liquidation process to the rescue process. This is particularly relevant if a creditor has imposed the liquidation process on a debtor.
Best Practice Standard 4
Application of Standards 4.1 and 4.2 to the insolvency laws of the RETA economies.
COMMENT
There is some considerable variation between the economies in relation to application of these very important standards.
The English insolvency law based economies apply both standards.
In relation to bankruptcy or liquidation, Japan, Korea, and Taipei,China appear, in practice, to apply something approaching these standards but their respective insolvency laws contain only a general statement of the criteria for insolvency and do not provide specific procedural rules by which the criteria may be presumed or proved. In Japan, for example, the relevant articles of the law provide that when a debtor is unable to pay the debtor may be adjudged bankrupt and that a debtor shall be deemed unable to pay when the debtor has suspended payment . There are no definitions or meanings of these terms in the law. The criteria are vague and could be extremely difficult for a creditor to establish.
Indonesia has a particularly good, low threshold, criteria for its reorganisation process. It states that a debtor who is unable or expects to be unable to continue to pay matured debts may apply for reorganisation. Singapore also has an acceptable low threshold test for judicial management. The law states that a company that is or will become unable to pay its debts as they fall due may apply for judicial management.
The law in Thailand actually prohibits voluntary bankruptcy and provides a high threshold (asset/liability) test for all other applications. This causes considerable difficult in practice. Reform on this aspect is urgently required in Thailand. The reform should:
The Philippines applies the threshold criteria standards, but it is necessary that three creditors join in a petition for bankruptcy or liquidation against a corporation.
It is recommended that the economies in which there is either no or only partial application of these standards consider reforms to their respective laws.
There are three important matters to consider under this heading. One is management of the affairs of the debtor corporation. The second is the stay or suspension of actions or proceedings against or affecting the property of the debtor corporation. The third concerns the ongoing funding of the business operations of the debtor corporation
5.1 Management/Control
If a debtor corporation is to be liquidated, the total powers of management should pass to an independent administrator as soon as possible. In the case of a rescue, the options are:
The third of these options appears to be the most desirable. The removal of all power from existing management, except in particular circumstances, can cause damage and can result in repercussions. For example, if a debtor corporation is seeking a genuine rescue, the removal of or an extreme reduction in the powers of management might sometimes remove the incentive. If, on the other hand, the creditors have little or no confidence in existing management, to maintain existing management with no check on powers can antagonize creditors. Sometimes the solution will depend on whether the process is voluntary (where the debtor corporation has applied) or if it is involuntary (where a creditor or creditors have applied and the debtor corporation is hostile). There will also be cases in which it will be necessary to appoint a provisional or interim independent administrator.
Best Practice Standards 5.1 and 5.2
Application of Standards 5.1 and 5.2 to the insolvency laws of the RETA economies.
COMMENT
There is a general application of standard 5.1 but some variation in the application of standard 5.2.
In Japan and Korea, the reorganisation law provides that upon the commencement of a reorganisation an independently appointed receiver shall exclusively manage the business and assets of the company. Although, in most cases, the practice is that the management continues to work with the receiver, some reform to this aspect should be considered in these jurisdictions.
In Taipei,China the law permits the directors of a corporation to be the reorganisers without any independent supervision.
In Singapore and Thailand the law actually suspends the powers of management. In Thailand that presents a problem because owners of corporations (particularly family owned corporations) have a strong cultural and commercial aversion to surrendering complete control. It may be necessary to review this aspect of the Thailand law.
5.2 Stay and Suspension
The policy issue is whether there should be an immediate stay or suspension of actions and proceedings against property of the debtor corporation and, if so, the terms and conditions of such a stay or suspension. This raises the problem of the extent to which an insolvency law should intrude into and interfere with accepted commercial practices and processes. For example, should an insolvency law restrain the rights of secured creditors? This issue is more fully addressed in the chapter of this report on the intersection of insolvency law regimes and secured transaction law regimes. It is suggested that for policy and pragmatic reasons there must be some restraint on some creditors if a fair and ordered administration is to result. For this reason, it is highly desirable that some form of stay or suspension comes into immediate effect once an application has been made, particularly by a debtor corporation, for relief under the insolvency law. This so-called "automatic" stay or suspension is a feature of many modern insolvency regimes. If a creditor or creditors have applied, there should not be an immediate stay or suspension until the application has been heard and determined, but a stay should be capable of being applied, on an interim basis, if circumstances can be shown to warrant it. In the environment of the "rescue" culture, the dictates of policy suggest that where there is a genuine aim of effecting a rescue, the extent of automatic stay or suspension should be very wide and all embracing. The rationale for this is that attempts at rescue will fail unless the essential assets and component parts of the debtor corporation and its businesses are maintained However, where it is clear that the corporate debtor will be liquidated that rationale is no longer relevant and the stay or suspension should only affect unsecured creditors. The duration of the stay in a reorganization should be limited and should be consistent with the time that it might reasonably take for a reorganization plan to be approved or not. Secured creditors affected by a stay should have a right to apply for the stay to be lifted if it is shown that they will be severely prejudiced. It is not appropriate for a stay to be of an uncertain or unnecessarily lengthy duration.
Best Practice Standards 5.3, 5.4 and 5.5
Application of Standards 5.3, 5.4 and 5.5 to the insolvency laws of the RETA economies.
COMMENT
There is considerable variation between the economies in the application of these standards.
The main concerns that emerge are as follows:
The absence, in some reorganisation processes, of an initial automatic stay should be remedied.
Some of the other concerns are relevant to the position of secured creditors. Attention should be given by those economies affected by them because of the possible effect on the availability, terms and costs of secured financing. These areas are more fully addressed in the part of this Report that reviews the intersection of secured transactions and corporate insolvency processes.
A third aspect concerns the continued funding of the business activities of the debtor. If the debtor is suited only to liquidation, the problem of on-going funding will not, except in rare cases, be a problem. Usually the business of the debtor will have been closed down or will be in the stages of closing down. However, where a genuine prospect of rescue exists, on going funding may be of critical importance. If a debtor has no available funds to meet its immediate cash flow needs (for example, to pay for supplies, to pay wages to employees) a rescue will fail unless those funds can be provided. An insolvency law should and can help this situation by providing power to obtain funding and by providing assurances or protection for the eventual repayment or recovery of this funding. The law can do this by, firstly, recognising the need for and sanctioning such funding and, secondly, by creating a form of super priority for its repayment to the provider. It can also assist by recognising and enforcing, where it is appropriate, rights of subrogation.
Best Practice Standard 5.6
The law should sanction and provide for a commercially sound form of safe priority for funding that is necessary for the on-going and urgent business needs of a debtor during the rescue process.
Application of standard 5.6 in the RETA economies
COMMENT
There is a clear problem in the region in this area. The laws of only three economies, those of Singapore, Korea and Thailand, expressly provide for the possibility of sanctioning the provision of new money . However, of these, only the Singapore judicial management law provides for protection by way of priority repayment of that new money.
It is recommended that a regionally based technical assistance project should review the issue in more detail and propose legislative models for possible adoption in the region.
An insolvency law serves principally a communal or collective purpose. The operation of such a law will break down and become ineffectual if it is subject to delay or if it otherwise lacks an essential procedural framework to ensure that delay is kept to a minimum and cases are properly and timely processed. Sensible rules for the processing of cases of corporate insolvency or financial difficulty are most necessary.
These should be consistent with ensuring that the parties receive fairness and justice. Swift and reasonably rigid time limits are necessary to ensure that the process is conducted without delay. However, not only should the law provide for this, it is equally essential that a court or other tribunal ensure that these requirements are met.
Best Practice Standards 6.1 and 6.2
Application of Standards 6.1 and 6.2 to the insolvency laws of the RETA economies.
COMMENT
The insolvency laws of most of the economies apply these standards.
The reforms to both the Indonesian and Thailand insolvency laws prescribe strict time limits for all stages of both liquidation and reorganisation proceedings. They provide very good models.
In Singapore the judicial management process is also subject to practical short time limits and operates extremely well.
The reorganisation process in the Philippines operates swiftly. This is primarily due to the case management skill of the SEC. It drives the process efficiently.
The principal reorganisation laws of Japan, Korea and Taipei,China provide for lengthy and drawn out procedures. The reorganisation processes in those economies are consequently subject to extensive delay.
In some of the other jurisdictions there is a problem of timely and efficient processing because of inefficiencies in the court and judicial system. Consequently the commercial need of the standard is not often reached. This is particularly so in Pakistan and India where the liquidation and reorganisation processes can be subjected to extreme delay because of general delays in the court systems.
The main processes of the liquidation of an insolvent corporation involve the following:
The performance of these tasks requires special skills and experience. Once the process has been commenced, there must be a steady, certain and ordered progression of each case. For cases of liquidation, the experience in many jurisdictions is that they are usually best administered through a special government agency. Sometimes, if the liquidation is complex, the administration is transferred out to specialist private administrators with suitable qualifications and experience. The administration needs to be conducted professionally and efficiently and with as little delay as possible.
Best Practice Standards 7.1 and 7.2
Application of Standards 7.1 and 7.2 to the insolvency laws of the RETA economies.
COMMENT
The law in most of the economies applies both these standards. However, in some of the economies there are problems in the execution. It is often slow, inefficient and lacks a commercial approach. This is due to a lack of knowledge and expertise in the government agencies. That, in part, is the product of inadequate staffing and resources. It should be observed, however, that many of the more developed countries suffer from similar problems. The need for a professionally managed and operated government department or agency has not been sufficiently recognised.
Hong Kong, China and Singapore provide the best examples and models of a properly resourced, professional government agency of the kind that is needed to efficiently conduct the large bulk of corporate liquidations.
In Pakistan, India and Indonesia the public agencies that administer liquidations is not adequately resourced to enable the administrations to be conducted efficiently
In a number of the economies there is a need for technical assistance to provide more knowledge, training and expertise for the government administration agencies.
One of the most important things for a rescue process is the conduct of a thorough independent assessment of the business activities, assets and liabilities and general affairs of the debtor corporation. Transparency of the process is important. It is ultimately for the creditors to determine on a course of rescue or otherwise for a debtor. It follows that the creditors must be provided with all relevant information concerning the debtor, its assets and liabilities, financial position and affairs generally so that they may make an informed decision.
The law must, therefore, proscribe, in broad terms, the substance of the information to be provided and how and when that information is to be provided.
In some jurisdictions this has been developed to the point of devising standardised information schedules. Sometimes this is left to the debtor to provide (with sanctions for false or misleading information) or for the information to be gathered and presented by an independent person.
If it is proposed that the business of a debtor will continue to be conducted, other important information will include matters such as projections of profit/loss, cash flow, marketing, industry trends and so forth. Although it may not be considered necessary for the law to exhaustively detail the provision of this type of information, it can be beneficial in countries that have little experience of formal (or informal) rescue techniques if the law provides some detail of the type of information that is expected.
Other important information to be provided to creditors concerns:
If the provision and critical analysis of information is left to the debtor alone, there will be no objectivity in its presentation and assessment for creditors. It is therefore important to provide for the appointment of an independent person to, at least, review and comment on the information.
Best Practice Standards 8.1 and 8.2
Application of Standards 8.1 and 8.2 to the insolvency laws of the RETA economies.
COMMENT
The laws in most of the economies endeavour to apply these standards but with varying degrees of effectiveness.
The economies that have more recently enacted formal reorganisation processes, such as Singapore, Thailand, Indonesia and Philippines, attempt to provide the greatest application.
The Singapore judicial management law provides an excellent model.
However, the position in Thailand, Indonesia and Philippines is not entirely satisfactory because of problems associated with the appointment of an independent expert or advisor to ensure that the provision of information is handled professionally and objectively.
In a number of the economies there appears to be a cultural or commercial aversion to the employment of professional experts and advisors. This is often more an issue of expense and cost than anything else. It may be an extension of a similar reluctance on the part of family controlled corporations to employ management and finance expertise or to retain independent executive directors as members of the management board.
Ultimately this type of problem places a severe strain on the reorganisation process. Unless there is a willingness for the appointment of independent professionals both debtor and creditors become suspicious and sceptical of the process. Invariably that strain carries through to the courts. In some jurisdictions they are expected to be the arbiter between creditors and debtor and to exercise commercial judgement in supervising the process. This is not a role to expect a court to play in the commercial environment of reorganisation.
General. Unless creditors are involved in the insolvency process the law will seem irrelevant. Although, in the case of liquidation, the creditors may not have much need for intervention or decision, it is nonetheless important that they be involved and receive reports on the conduct of the liquidation. In the case of a rescue, the creditors are vitally important.
A rescue process is largely the province of creditors working, hopefully, in concert with the debtor. Creditors are vital to the process. They need to be organised, available and involved. A rescue or reorganisation process should, in effect, create a market place of its own where the bargaining, dealing and negotiation of people of commerce can be given full and fair effect.
The interests of creditors should prevail in decision making as part of the rescue process. That is dictated by the fact that, because the corporation is insolvent or in extreme financial difficulty, the capital or equity of owners will have been severely depleted, if not completely lost and, although they have been affected, it is the creditors whose interests should become paramount.
It should be the decision of the creditors that will determine whether a proposal of rescue is accepted or not (and, under some regimes, if it is not accepted, that the company be liquidated). Meetings. Meetings of their number as a whole are obviously important. Also important is the selection, appointment and formation of a small committee of their number, which can take a more active and involved role in considering the adequacy or otherwise of information, the formulation of a plan and, possibly, the implementation of a plan.
Meetings, to be effective, require organisation and control. Rules and procedures are required to deal with such things as the calling of meetings, the eligibility of persons to attend and participate in meetings (including voting rights and establishing quorum) and the chairing and general conduct of meetings.
Classes of creditors. The interests of which account should be taken are secured creditors, preferred (or priority) creditors, unsecured (or ordinary) creditors and persons who own property which is used, leased or occupied by the corporation. Sometimes, depending upon policy dictates, account is also taken of employees as a further separate interest group. It is probably safer to provide for classes of creditors, although some jurisdictions appear to function quite well without an immense or any detailed structure or sophistication in this area. The law should be sensitive to the position of secured creditors. If the rescue proposal is such that it might affect secured creditors (in the sense of reducing the value of their security or seriously impairing their rights to enforce the security), they should normally be afforded voting rights as a separate class.
Voting. As between creditors themselves, a system of voting rights and their exercise is used to distinguish between creditor interest groups; and bind creditors to decisions reached in accordance with the exercise of voting rights. Much may be written on the issue of voting rights and their employment. But essentially this may be reduced to two issues voting rights and powers; and the effect of a majority vote.
For reasons of principle, policy and pragmatism, an insolvency law, despite that it is a collective legal process, cannot accord equality to different, competing interests; nor depend upon the need for unanimity within different interest groups for its application. However, it is most necessary that the process have binding effect. In many jurisdictions the voting rights of creditors are measured by reference to their number and the value of the debts owed to them. Thus, for example, the approval of a proposal of rescue might require a majority vote in both number and value. This can sometimes produce the problem of a deadlock. There may be a majority in number but not a majority in value or vice versa. In some jurisdictions simple majority in number determines voting only. The effect of a majority vote to approve a plan should be to bind all creditors. Likewise, the effect of a majority vote not to approve a plan should result in or lead to a conversion of the administration process to one of liquidation. It should always be possible, however, for a majority of creditors to vote to adjourn the decision meeting if it appears that some further negotiation on a plan might produce a favorable result. As with all areas of the process, however, adjournments should be kept within reasonable limits and strict time limits should apply. The prospect that a debtor will be liquidated unless agreement can be reached produces a powerful incentive for the efficient operation of the reorganization process. Manipulation. Under any system of voting it is important to ensure that voting powers are not manipulated and that the interests of genuine creditors are not interfered with nor prejudiced by the voting powers of persons who are connected to the corporation. These are commonly referred to as insiders persons who have some intimate connection or relationship with the debtor, its directors, mangers, owners and shareholders. The law must ensure that the rights of commercial creditors are not abused else they will be totally disaffected by the process.
Best Practice Standards 9.1, 9.2, 9.3, 9.4 and 9.5
Application of Standards 9.1, 9.2, 9.3, 9.4 and 9.5 to the insolvency laws of the RETA economies.
COMMENT
In general there is high creditor involvement in the reorganisation process, which is of cardinal importance. The only exception appears to be in the Philippines where there has been an absence of organised creditor involvement in the reorganisation process. However, the new procedural rules appear to provide for greater creditor consultation and involvement.
Indonesia makes no provision for classes of creditors.
There appears to be a weakness in some economies regarding the possibility of insider voting manipulation. This is because either the law makes no specific provision and leaves such issues to be determined by the courts or the law is not sufficiently specific.
Voting requirements for approval of plans of reorganisation vary considerably and demonstrate a remarkable range. This can be as low as a simple majority vote to a majority as high as 75% and in some economies there is a requirement for a dual standard of majority both of number and in aggregate debt of creditors.
Three main aspects must be considered. First, what should be the nature or form of a plan? Secondly, what opinions or comments should accompany a plan? . Thirdly, who should devise a plan?
Nature or form of plan. The purpose of rescue is to maximise the possible eventual return to creditors and provide a better result than if the debtor were, hypothetically, liquidated. It follows that the law should not intrude greatly or at all in proscribing the nature or form of a plan. It should not, for example, permit only of a plan that is designed to fully rehabilitate the debtor; nor should the law provide that debt cannot be written off; nor should it provide that a minimum amount must be eventually paid to creditors. In short, the law should leave it to the market place, which the process helps to form, to determine what is the appropriate commercial solution.
Of course, there may be some boundaries that some jurisdictions might want to establish. For example, that the preference or priority accorded to some classes of creditors in, for example, a liquidation must be maintained in a rescue plan. Or that the effect of the plan must not be such that it could result in a debtor remaining insolvent and being returned to the market place in that condition.
A non-intrusive approach regarding the nature or form of a plan is desirable. This enables any one of a number of possibilities to result. It could be a simple composition ; it could provide for the continued trading of the business and for its eventual sale as a going concern (and for the debtor to then be liquidated); it could provide for a sophisticated form or restructuring of debt and equity and so forth.
Comments on a plan. It further follows that if the nature of the rescue process is to provide a better eventual result for the creditors than if the debtor was liquidated, there should be some objective statement from an independent adviser to that effect. Likewise, that if a plan projects an eventual satisfaction (whether by composition or otherwise) of debts or other liabilities, some objective statement of the commercial probability of that should accompany the proposed plan.
Devising a plan. The final issue of who should have the responsibility of devising a plan is, in a commercial sense, dictated by the reality that a number of people may be expected to play a part. Certainly it may be expected that the management (and/or owners ) of a debtor should have a major and, possibly, the principal role. But so would an independent adviser if they are expected to comment on a proposed plan. Major creditors may also expect to be involved possibly not so much to initiate but certainly to participate in and negotiate the generation of a suitable plan. It may not, therefore, be necessary for the law to become intensely regulatory in this area. In the interests of certainty and efficiency, however, it is desirable that the law make some statement on those aspects and that a specified time limit is provided for the presentation of a plan.
This last observation is important because a tight time frame for the presentation and consideration of a plan places desirable pressure on both the debtor and the creditors to endeavour to reach a satisfactory arrangement. Combined with a provision of the law that will effect a conversion to liquidation unless a plan is agreed within a limited period of time, a commercial environment is created that causes both sides to work toward a beneficial result.
Best Practice Standards 10.1, 10.2 and 10.3
Application of Standards 10.1 10.2 and 10.3 to the insolvency laws of the RETA economies.
COMMENT Most of these standards are applied in most of the economies. However, there are some areas to which attention should be directed.
With the exception of Singapore and Thailand, none of the insolvency laws provide that the result (or intended result) of a plan must provide a greater benefit to creditors than if the debtor corporation was liquidated. This is, in part, compounded by the absence, in some of the economies, of a requirement for an objective analysis of a plan. In some instances these omissions place an unnecessary burden on the supervising court or tribunal and may require the court or tribunal to form some judgement of its own on the plan. That may be considered desirable because it at least provides some protection for creditors, but it detracts from the commercial forum that a reorganisation process should endeavour to establish so that the participants can form their own judgement based on objective evidence and opinion. Without that essence the process becomes an essentially legal and constricted process.
It is suggested that this area of the law might be greatly improved in some of the economies. Two examples follow.
The Indonesian reorganisation law makes provision for an independent trustee to provide a report on the proposed plan but it does not specify that an objective critical analysis of the plan must be part of the report. This would be a valuable addition to the Indonesian process.
In Thailand there are problems in securing an independent person as the planner of the plan of reorganisation because of both fear of loss of control and an aversion toward paying for the services of an experienced and professional person. Yet it is clearly important in that jurisdiction that the rehabilitation process have every characteristic of a commercial forum. The position in Thailand would be greatly improved by the establishment of a body of independent, qualified planners.
11.CONTROL/SUPERVISION OF PROCESS
This leads to a consideration of the most appropriate role for a court or tribunal to perform in the rescue process.
The obvious areas in which a court or tribunal involvement is desirable are these:
Best Practice Standard 11
The law should provide for a court or other tribunal to have a general supervisory role of the rescue process. In particular the court or tribunal should be empowered to set aside the approval of a plan if it is shown that it is not in the best interests of creditors considered as a whole.
Application of Standard 11 to the insolvency laws of the RETA economies.
COMMENT
In some of the economies a considerable supervisory burden is placed on the courts because of deficiencies in other parts of the law relating to the provision of information, the preparation of a plan of reorganisation and the conduct of meetings of creditors to consider and approve the plan. The comments made in relation to Standard 10 are relevant to this standard. For example, in Japan, Korea, Taipei,China and Indonesia, the control or function of the courts is very involved. This contributes to considerable delay in the process.
In the Philippines, the SEC, which acts in an extra-judicial capacity, has a quite extraordinary power to set aside the decision of a majority non-approval vote of the creditors in relation to a proposed plan of rehabilitation. The SEC can, in effect, impose a plan upon creditors if it is of the opinion that the non-approval of the majority is manifestly unreasonable . That runs quite contrary to the above standard.
12. IMPLEMENTATION OF PLAN
Most plans will be executed without a great deal of need for further intervention. Sometimes, however, it might be necessary that the implementation be supervised or controlled by an independent person.
Of more importance, however, is what occurs if execution of the plan breaks down or is found to be incapable of performance. Many jurisdictions provide for the possibility of a plan being amended if that is in the interests of creditors. But if a plan becomes impossible of performance (through, for example, the default of the debtor) the law should make provision for the plan to be terminated and for the debtor to be liquidated
Best Practice Standards 12.1, 12.2 and 12.3
Application of Standard 12.1, 12.2 and 12.3 to the insolvency laws of the RETA economies.
COMMENT
The laws of some of the economies are not sufficiently explicit regarding supervision or control of the implementation of a plan. In practice this may not present a problem if the plan is implemented. But it can present a serious problem in the event that the plan may require amendment or cancellation. Likewise, many of the laws are silent regarding the possibility of and the procedure for amending a plan. In Indonesia, for example, the provisions for supervision or execution of a plan are weak. In particular, there are no adequate provisions for possible amendment of a plan or for the termination of a plan if there is a failure to perform it.
The most notable failing, however, is that only a very few of the insolvency laws make it clear that the failure of a plan should lead to the immediate liquidation of the debtor corporation.
13. CREDITOR PRIORITIES
A major difference in insolvency law regimes is in the ranking of preferred or priority creditors. Many insolvency law regimes, for example, provide that debts such as tax debts and debts due to employees are to be paid in full, ahead of all other creditors. To give greater effect to one of the underlying principles of an insolvency law - equal treatment for creditors - the modern approach is to limit priority claims as much as possible. Clearly, secured creditors are entitled to be paid their claims from the proceeds of secured property. It must also be the case that the costs of the insolvency administration (whether under a liquidation or rescue process) should be paid in priority to any other claim. However, with those exceptions, it should be the aim of a modern insolvency law regime to limit the number of priority claims to as few as possible.
Best Practice Standard 13 An insolvency law regime should, as far as possible, preserve the principle of equal treatment for all creditors. Accordingly, the insolvency law should limit the number of priority claims to as few as possible.
Application of Standard 13 to the insolvency laws of the RETA economies.
COMMENT
Very few of the economies have sought to limit priority claims. In Indonesia, for example, there is a long list of priority claims and taxation claims are given priority over all other priority claims.
It is recommended that all of the economies should review the priority provisions of their respective laws and consider whether policy, economic and commercial considerations support their retention. In cases where some creditor claims are given priority ahead of secured creditors from the proceeds of the sale of secured property, carefully consideration should be given whether such a policy is justified.
14. AVOIDANCE OF TRANSACTIONS
One of the more extraordinary policies of established insolvency law regimes is to include provisions, which have retrospective effect. These are designed to upset and overturn past transactions to which an insolvent corporation was a party that have had the effect of either reducing the net worth of a corporation (for example, by gifting its property or transferring or selling property for less than its fair commercial value) or of upsetting the principle of equal sharing between creditors of the same class (for example, by payment of a debt to an unsecured creditor or granting a security to a creditor who is otherwise unsecured when other unsecured creditors remain unpaid). This aspect of an insolvency law regime is much debated. The debate centers not so much on the policy behind such provisions but on how effective in practice such provisions are and the somewhat arbitrary rules that are necessary to define, for example, relevant time periods and the nature of the transactions themselves. There is some validity in the criticism that the actual operation and enforcement of such provisions is not, in many cases, effective. Nonetheless, it may be submitted that avoidance provisions are important because, first, they are sound in policy; secondly, they may result in recovery for the benefit of creditors; and thirdly, provisions of this nature help to create a code of fair commercial conduct and are part of appropriate standards for corporate governance.
Best Practice Standard 14 An insolvency law regime should contain adequate provisions relating to avoidance of transactions, which result in damage to creditors or conflict with the principle of equal treatment of creditors of the same class
Application of Standard 14 to the insolvency laws of the RETA economies.
COMMENT
Considerable care must be taken with this assessment because, although all of the insolvency laws contain avoidance provisions, in some laws the provisions are expressed vaguely (for example, in the Indonesian law) and there is some considerable doubt about their effectiveness and application. It is difficult to be precise about the degree of application in practice. Some of the local reports suggest that there is a considerable failure to apply this part of the law. In part, this appears to be due to the absence of professional experienced insolvency administrators who have the ability and skill to properly investigate suspect transactions and to then prosecute their avoidance. In some of the economies the judges may not have the necessary experience and knowledge to conduct avoidance cases.
This is an area in which training and education is especially required as part of a general training and education project on the operation and administration of an insolvency law regime.
15. CIVIL SANCTIONS
The conduct and behavior of owners and directors of a corporation is primarily a matter of corporate law policy and regulation. It should not, for example, fall to an insolvency law to remedy defects in that area of legal regulation or to police corporate governance policies. However, if the consequence of the past conduct and behavior of persons connected with an insolvent corporation is that damage and loss is caused to the creditors of the corporation (for example, by fraud or irresponsible behavior), it is the appropriate province of an insolvency law to provide for the possible recovery of the damage or loss. This should extend to powers of inquiry and examination.
Best Practice Standard 15 An insolvency law regime should contain provisions for the civil sanction of fraudulent and other like conduct in the operation and management of a corporation, which causes damage or loss to creditors of an insolvent corporation.
Application of Standard 15 to the insolvency laws of the RETA economies.
COMMENT
Although most of the laws contain some provisions relating to this standard, it is highly questionable whether they are applied or enforced. The comments made in relation to Standard 14 are apposite here. It is another area that would benefit from special training and education.
16. CROSS-BORDER INSOLVENCY RECOGNITION & ASSISTANCE
The growth of both regional and international trade and commerce has focused attention of the many problems associated with cross-border insolvency. The trading and business activities of a corporation (particularly the "multinational" form of corporation) may result in the corporation having businesses, assets and trading activities in more than one country. If such a corporation becomes insolvent and is subject to an insolvency administration in one jurisdiction it becomes important that the other jurisdictions in which its business activities are situated can respond to and, hopefully, cooperate in the overall administration of the corporation.
This is a particularly important factor in relation to a corporation which is proposing a rescue.
A number of initiatives have been taken in an attempt to provide for the effects of cross-border insolvency cases. A number of countries have enacted unilateral recognition legislation as part of their domestic insolvency law. Examples of this are found in the insolvency law regimes of USA, England, Australia and Canada. Although provisions such as these are reasonably effective, they suffer from the fact that they are unilateral (and, therefore, one sided), they are usually restrictive and confined in their application and sometimes they may be discriminatory and unpredictable in their application.
There are two examples of a multilateral treaty approach. The most effective is between the countries of Scandinavia (Sweden, Norway, Denmark and Finland). The effect of the treaty is that there is automatic recognition in all treaty states of a case of insolvency adjudicated in one of the treaty countries. The treaty provides for mutual co-operation and assistance in such cases. The other example of the multilateral treaty approach is found in South America through the Montevideo treaty on bankruptcy. Some of the countries of South America are signatories to this treaty, which has been used on some occasions for mutual recognition of cases of insolvency.
The countries of the European Economic Union have attempted, but so far without success, to promote a "convention" on bankruptcy recognition and co-operation. The form of this approach is similar to conventions on recognition and enforcement of judgements.
Although not the subject of a treaty or convention, two of the RETA economies, Singapore and Malaysia, have provisions in their respective bankruptcy laws, which provide for mutual recognition of and assistance in cases of bankruptcy originating in their respective jurisdictions. These provisions, however, are confined to cases of individual bankruptcy and do not extend to cases of corporate insolvency.
The most recent development has been to propose uniform cross-border insolvency legislation, which would equip every country with similar legislative provisions regarding recognition, relief and co-operation between and with the courts, regulators and administrators of other countries. This has been the trust of the model cross-border insolvency law proposed by the United Nations Commission for International Trade Law (UNCITRL) of May 1987.
The UCITRAL model law has the following important features:
The UNCITRAL model law requires adoption by individual countries. Thus far, countries such as USA, Australia, Canada, New Zealand and England have indicated support for the adoption of the model law. It is highly probable that the model law will be substantially adopted in both the USA and in Australia within the next 6 months.
Best Practice Standard 16 An insolvency law regime should include provisions relating to recognition, relief and co-operation in cases of cross-border insolvency, preferably by the adoption of the Uncitral model law on cross-border insolvency.
Application of Standard 16 to the insolvency laws of the RETA economies.
COMMENT
The region is extremely weak in this area.
In four of the economies, Japan, Korea, Taipei,China, Thailand and Indonesia, the insolvency laws are specifically territorial. Those laws each provide that an insolvency administration originating in their respective jurisdictions shall have no territorial effect. They further provide that an insolvency administration originating in another country shall have no effect in their respective jurisdictions.
In the remainder of the economies co-operation and assistance regarding insolvency cross-border insolvency administrations maybe possible but only by the application of discretionary and uncertain basic law principles.
Only Singapore and Malaysia have specific legislative cross-border insolvency provisions between them. However, these provisions only apply to cases of individual bankruptcy.
It is recommended that a technical assistance project review this area in the region to assist in the development of legislative provisions for cross-border co-operation and assistance in insolvency cases. This legislation should be largely based on the UNCITRAL cross-border insolvency model law provisions.
PART 6
FULL ASSESSMENT OF APPLICATION WITH BEST PRACTICE STANDARDS
A = Applied P = Applied in part N = Not Applied
A = Applied P = Applied in part N = Not Applied
A = Applied P = Applied in part N = Not Applied
ASSESSMENT OF APPLICATION OF STANDARDS AND RECOMMENDATIONS
Given the number and the wide variety of economies and the differences in legal systems, there is a reasonably high degree of application of the standards in the insolvency laws of the RETA economies. It is clear, however, that some considerable reform is necessary in a number of important areas. This section contains a summary review and identifies the areas in which reform and further technical assistance is desirable.
(a) Coverage
(b) Application
(c) Access
(d) Single/dual process
6.3 Other aspects
The laws of all the economies are deficient in providing for cases of cross-border insolvency. This is an important area for the region as a whole. A technical assistance to promote regional and international co-operation and assistance in cross-border insolvency matters is recommended.
PART 7
INFORMAL PROCESSES
The concept of the informal work-out emerged some ten years or so ago in the USA and England, as an alternative to the application of formal insolvency law processes. Some commendable pioneering work to encourage the development of this approach was done, in a non-official capacity, by the Bank of England. It has since been further developed by some of the leading English commercial banks. This development has become known as "the London approach". In America, the concept of the informal work-out has become possibly more developed. It is now sometimes used as the preliminary to that which has become known as a "pre-packaged" chapter 11. In recent years the practice and development of the informal process has spread to many countries. It has recently been enhanced by an endeavor, through the initiative of major bank and other financial groups, to determine acceptable work out standards. These have now been refined and proposed in the form of a Protocol on Global Approach to Workouts , a copy of which is appended to this Report. The standards have been formed in consultation with the banking and financial sector, representatives from treasury departments of large corporations and representatives of central banks. Although it may seem to be a somewhat institutional development, the approach to workouts in the protocol remains a purely voluntary process.
The reasons for the development of the informal process are important because they suggest that even the more developed and "modern" formal rescue regimes are not always entirely suitable to the task of rescue. It is claimed that, first, there is a need for something more flexible and less rigid than the process which is available under formal insolvency rescue regimes and that, secondly, many cases of corporate financial difficulty require much earlier pro-active response from creditors which is not normally possible under the formal rescue regimes. It is also suggested that, because of the essentially private nature of the process, there is less publicity and less commercial damage for the debtor.
The informal work-out depends for its effectiveness on a number of well defined initial premises. These may be summarized as follows:
Of these, it is possibly the last factor that provides the main impetus to bring the creditors and the debtor together. That is yet another reason why an efficient insolvency law is important. 7.4 Main processes To be effective a work-out requires the employment of a number of skills and processes. Graphic B presents a diagram of a typical informal process.[ANNEX GRAPH] The most important of these processes are the following: (a) The creation of a "forum" in which debtor and creditors can initially come together for the purpose of exploring and negotiating an arrangement to deal with the financial difficulty or insolvency of the debtor. This "forum" is not only for the benefit of the debtor and its creditors, but also for the creditors, between themselves. (b) The appointment of a "lead" creditor to provide leadership, organization, management and administration. (c) The selection of a committee which is representative of creditors (commonly called a "steering" committee) to assist the lead creditor and to act as a provisional sounding board toward proposals for the corporate debtor. (d) A "standstill" (an agreement to suspend adverse actions by both creditors and the debtor) during a defined, preferably short, time period. The standstill may be compared to the "moratorium" or stay of actions and proceedings, which has become an important feature of formal rescue insolvency law regimes. In essence, the participants in the proposed work out (the creditors) agree not to improve their position relative to each other. The debtor agrees not to change its position other than in the normal conduct of its business. (e) The gathering and provision of complete and accurate information regarding the corporate debtor, including its business activities, current trading position, general financial position and assets and liabilities. This may be compared to the statutory requirement for the provision of similar material, which is found in most of the formal rescue regimes. 7.5 Practical processes and problems (a) Commencing the process A work-out essentially involves bringing debtor and creditors (at least, the main creditors) together. Someone has to initiate the prospect of intercourse. This is really up to the debtor and/or one or more of the main bank creditors. The informal work-out process does not rely upon a facilitator to impose, initiate or help the process along. Sometimes commencement poses difficulties. A corporate debtor may, for example, be willing to have negotiations with its main bank creditor (who might be expected to be in a position of considerable control) but may be unwilling or not appreciate the desirability of discussions with a number of creditors. As between the creditors themselves, some of them will be concerned for their own position and may not wish to participate in or contemplate a "collective" approach. These types of problems can sometimes be overcome. An approach in the main jurisdictions has been to use the sanction of quick and convenient access to both individual debt enforcement processes and formal insolvency law procedures as "bargaining" factors in the commencement and progression of an informal work-out. The availability of this type of "shadow" sanction can influence both a corporate debtor and its creditors. If a corporate debtor refuses or is reluctant to participate in an informal process, it will almost certainly lead either to individual debt or security enforcement action or the application of the formal insolvency procedures which the debtor will not be able to delay nor defeat. Unwilling creditors face much the same sanction. They may find that they are subject to a formal insolvency process which effectively prevents them from enforcing their individual rights and may not represent the most optimal process for creating the most value. (b) Engaging advisors Few, if any, attempts are made at a work-out without the involvement of independent experts and advisors from various disciplines (for example, legal, accounting, finance and business reorganization, marketing). It is often the corporate debtor, sometimes creditors, who will refuse to engage or suffer the appointment of such persons because of cost, intrusion, and a reluctance to surrender control and other reasons. But it is normally a necessity. Information, independently verified, is the prime pursuit of the creditors together with professionally developed plans of refinancing, restructuring, management and operation. The contention of the creditors, which would seem somewhat indefensible, is that this would normally occur under a formal insolvency rescue regime and it should also occur in the informal situation.
Creditors will rarely be in the same position as one another. Some will have security. Some will have better security than others. There may be issues between creditors of competing priority rights (or rights generally) in respect of the same security property. Unsecured creditors may also have different rights. Some may have guarantees from third parties. Lease finance creditors may have rights to recover leased equipment. Some creditors may be subrogated to others. This complexity often presents critical problems, particularly if the aim of the process is to maintain the assets and business undertakings of the corporate debtor together. If some creditors have commenced recovery or enforcement action it may be difficult to dissuade them from continuing with that enforcement. The prospect of a work-out breaking down because of the differences between creditors can only be dealt with by a combination of two things. First, the persuasion that there is a prospect of a better result through the work-out process and, secondly, the threat of the sanction of imposing a formal insolvency process that will have the effect of restraining all creditors from pursuing individual rights.
Unanimity amongst creditors cannot be anticipated nor expected. In part, the problem of dissenting creditors can only be dealt with as mentioned above or by the application of some "peer" group pressure on the dissenting creditor. This is not uncommon in established banking sectors. But, because it is an informal process there are no rules of enforcement by which a dissenting creditor may be compelled or bound to the view of the majority. This sometimes results in the trading of "distressed" debt. A bank creditor may not, for example, be willing to participate in the work out process or may not be prepared to wait or renegotiate the eventual repayment of the debt. There are debt traders who might be prepared to acquire the debt. If this occurs the debt trader becomes the creditor and engages in the work-out. This can produce a culture clash because bank creditors and distressed debt traders come from different backgrounds and exhibit different approaches toward debt recovery.
In most cases of informal work-outs it is impossible to involve every creditor in the work-out process. One problem is often the sheer number of creditors. Another is the inefficiency of involving creditors who are owed small amounts. Yet another problem is that many creditors do not have the commercial expertise and knowledge to participate in the process. But, even though they may be left out from the "forum", they cannot be forgotten nor ignored. Some of them may be important. They might be suppliers of essential goods or services or they may participate in essential parts of the production process of the debtor corporation. It is often the case in an informal work-out that smaller creditors are paid in full and encouraged to continue their supplies of goods or services. From the perspective of the major creditors, this type of "favoritism" does not normally cause much harm.
If a corporation becomes a candidate for a possible work-out it will often require continued access to established lines of credit or the provision of fresh credit. There can be a problem with both. The normal reaction of a lender will be to terminate or close off access to any further credit. Evaluation and negotiation can only deal with this problem. If a lender is already secured there may not be a problem for that creditor to extend further credit. But the real problem arises when all lines of credit have been exhausted (or terminated) and there is a pressing need for cash flow and liquidity. This can only be provided by what is often referred to as "new money". The problem is whether a creditor or creditors who might be willing to provide this new money can be reasonably guaranteed that, if the worst happens, they will be repaid in full. The creditors who participate in an attempted work-out may agree amongst themselves that if one or more of their number provide "new money", the other creditors will subrogate their claims to enable the "new money" to be repaid ahead of those claims. Thus, as between that group of creditors, there is a contractual agreement for the eventual repayment of the new money to the creditor who provides it if the work-out is successful. However, if the attempt at the work-out does not succeed and the debtor corporation is liquidated, there is a problem concerning the treatment of a claim for the repayment of that new money. Unless there is security for the new money it will be an unsecured claim. Because the liquidation law will normally apply the principle that treatment of creditors in the same class must be equal, the claim for payment of the new money will be the same as any other claim of a non secured creditor. As a result the creditor who has provided the new money may receive only partial repayment or none at all. The insolvency laws of some countries have provisions which provide for a type of "super priority" to accommodate this type of problem. However, those legislative provisions, have been formed to operate only in the context of a formal reorganization process. It is doubtful that they would extend to cover informal work-out arrangements. This is an area upon which further technical assistance may be beneficial.
The commercial culture of many of the RETA economies appears to be more conditioned toward non-confrontational dispute resolution by negotiation and mediation and not the employment of strict legal processes. This suggests that there is a relatively firm basis upon which to promote and build the elements that are necessary to structure an informal negotiated approach to the problem of an insolvent or financially troubled corporate debtor. Initiatives at government level to promote the concept of the informal work-out were taken in Indonesia, Thailand, Malaysia and Korea in response to the financial crisis. As will be seen, these are more formally structured because they are operated through an agency that operates in a semi-official capacity to promote and sometimes supervise work-out cases. Singapore and Hong Kong, China have also commenced to use informal processes. These processes are all largely modeled on the informal work-out technique developed in the USA and in England. Although they are of recent origin, the level of confirmed positive results demonstrates that they are capable of working extremely well. 7.7 Consideration of work-out models In Hong Kong, China and Singapore guidelines for essentially private and non-structural work-out processes have been developed by the commercial banking sector in co-operation with central bank or financial regulatory authority. The guidelines are largely based on the "London approach" and do not need any detailed analysis. They are essentially non-intrusive, voluntary and non-prescriptive. The basic framework was outlined earlier The initiatives of the other four RETA economies are of more comparative interest, but it should be observed that all of these initiatives have been adopted primarily to deal with the financially distressed banking and finance sector. Thus, in each of the economies the informal work-out process as applied to the corporate sector is usually a by-product of endeavoring to deal with non-performing loans in the banking and finance sector. This may help to explain why the processes are more structured and more formal than might otherwise be the case. This factor is also relevant in considering the long term future of the processes. The Indonesian, Malaysian, Thailand and Korean approaches each provide for a facilitating agency to assist the process. In Indonesia the facilitator is the Jakarta Initiative Task Force, appointed by the President. Its principal functions are to facilitate negotiations; refer cases of "public interest" to the courts under the insolvency law; and to provide a central reference point for obtaining necessary government and other approvals to implement plans of restructure. Working with this agency is an Advisory Committee whose functions include review of the workings of the informal process and making proposals for improvement and new approaches and actions. However, neither the Task Force nor the Advisory Committee may dictate the terms of a restructuring plan. Otherwise the Jakarta Initiative largely follows the "London approach" in process and methodology. In Malaysia there is a two-tiered system. First, the CDRC informal corporate debtor process. This process is operated through a Steering Committee, which convenes meetings between debtors and creditors to assist in each case of informal rescue. A permanent administrative Secretariat has been established by the central bank, Bank Negara Malaysia. Its function is to provide administrative and other support to the Steering Committee. It receives applications for the implementation of the informal process. An outside professional adviser has also been appointed to assist in formulating guidelines in the operations of CDRC and also to conduct a series of workshops and seminars to increase the level of public awareness. Secondly, as regards the banking and financial sector, a statutory corporation known as Danaharta was established with very wide powers to deal with distressed banks and other financial institutions. It has focused on the acquisition and management of non-performing loans in the banking sector. These loans are owed from the corporate sector. Once Danaharta acquires a non-performing loan from a bank it has an extraordinary wide range of powers with which to deal with the corporate debtor. These include that Danaharta may:
These are very strong extra-judicial powers. Korea established an "Administrative Committee" under its informal process. In turn it has appointed a "Company Restructuring Committee" to act as facilitator. The Korean informal scheme operates on the basis of an agreement between "Creditor Financial Institutions" who have chosen to be bound by the agreement. In effect, a case of possible corporate restructure would involve a corporate debtor of one of these institutions. That institution may invoke the informal process amongst the other institutions in respect of that corporate debtor. Once that occurs a stay or suspension of actions against the corporate debtor by any of the other institutions that are party to the agreement takes effect, by force of the agreement. The Korean approach is thus more in the nature of a formal agreement between certain banks to work toward the possibility of a restructure. It differs quite considerably from the voluntary informal approach in other jurisdictions. The approach in Thailand is, again, different. The structured informal process has been significantly assisted by the production of standard form Inter-Creditor and Debtor-Creditor agreements. These were settled in March 1999 as part of the operation of the structured informal work-out process through the CDRAC. The agreements are quite elaborate.
The first provides the basic conditions under which the creditor parties to a work-out will conduct themselves in endeavouring to reach consensus on proposed plans for corporate restructuring. It deals with such things as voting on plans, time limits for decisions, mediation of inter-creditor disputes, and the appointment of an executive decision panel to review and approve or reject a proposed plan. The decision of the executive panel is final and binding on the creditors who have executed the inter-creditor agreement.
The debtor-creditor agreement is required to be made by a debtor corporation that seeks to invoke the CDRAC informal work-out process. The debtor must be first approved by the CDRAC. In essence, this agreement is made with the banks and other financial institutions that are parties to the inter-creditor agreement. The debtor-creditor agreement, in turn, is binding on the parties to the inter-creditor agreement. The debtor-creditor agreement provides for such things as convening of meetings, lead creditor, steering committee, provision of information, undertakings by the debtor while the negotiation process is under way, mediation of disputes, debt trading, voting and approval of plan, implementation of plan. The agreement contains reasonably detailed schedules and time tables for the commencement and advancement of the workout process and of information that the debtor is required to provide.
From the statistical evidence that is available, the informal rescue process is clearly the area of the greatest development and success in corporate insolvency in the four economies that have established it. In only a short time since they commenced to operate, the statistics, comments and observations indicate that all the informal initiatives are working reasonably well.
These initiatives are important and deserve appropriate recognition, response and support. In the context of the cultural, social and commercial environment of many of the economies in the region, the development of this technique may prove to be of greater utility, though not necessarily of greater importance, than the development of formal rescue processes. However, it is useful to consider some of the areas in which difficulty has been experienced.
7.9 Malaysia
In respect of the CDRC informal work-out process, the Malaysian local consultant observed that although it is not very efficient or fast, it has been a major step in the right direction for Malaysia. The main problems seem to be that:
The views of some foreign bank officials in Malaysia indicated that their experience of CDRC is fairly favourable. They comment, however, that sometimes the rescue proposals that are made are not in the best interests of creditors as they might be or are too optimistic and non-commercial. There is not sufficient attention to detail, analysis, and verification of future income, cash flow projections and the like. Local banks tend to favour acceptance without proper analysis. Other comments include that local banks are not yet experienced enough; they send junior staff to meetings and do not respond to proposals and other deadlines on time. This can be particularly frustrating for lead bank and steering committees.
The CDRC itself has proposed administrative and other changes to improve the process. These proposals include that CDRC will itself take over the negotiation of appointment of consultants if there is prolonged disagreement and that three more members (from the banking sector) will be added to the steering committee. It is the steering committee that analyses proposals before creditors consider them. At present too many of these proposals come through the process without adequate analysis, causing inefficiency and delay.
7.10 Korea
There has been a significant concentration on informal techniques for cases of corporations that are in financial difficulties. In particular, the structured informal process that was created under the direction of the Korean Financial Supervisory Commission has been well utilised.
The Korean supplementary country report evidenced a number of successful work-outs through the employment of this process in which a variety of restructuring and refinancing techniques have been employed. These have included reduction of share holding of owners; debt/equity swaps among bank creditors; sale of non-core assets.
However, despite the apparent success of the process, there are some concerns that it is not operating as efficiently as it might. Problems are seen in a number of areas, such as:
It is considered that training and education, especially at management level, in work-out techniques, assessment of long term risk and negotiation would be of assistance.
7.11 Indonesia
The experience of the Jakarta Initiative is more difficult to discover. The Indonesian country consultant suggested that progress under this initiative has been a lot slower than anticipated and only a few restructurings have been put in place. The process has been also hampered by a lack of co-ordination between the relevant authorities.
The report of the World Bank, Corporate Restructuring & Governance Group, of April 1999, stated that the progress in finalising cases of informal restructuring has been slow. Reasons attributed for this include that both creditors and debtors have been reluctant to recognise losses, the new bankruptcy law has been ineffectively applied, and the complexity of the financial and operational restructuring that is required appears sometimes to be beyond local capacity.
The reasons why the operation of the Indonesian informal process initiative does not appear as successful as those of Thailand, Korea or Malaysia appear to be that, firstly, the bank restructuring authority, IBRA, does not appear to exert the same leverage on corporate debtors as its Malaysian counterpart, Danaharta. Secondly, recourse by a creditor to the formal insolvency processes (in particular, liquidation) in respect of a reluctant or hostile corporate debtor does not pose any great threat in Indonesia. Thus there is less motivation for a corporate debtor to engage in a voluntary informal work-out.
The CDRAC process has been reasonably successful. However, it should be observed that CDRAC normally only involves financial sector creditors and the process is really designed for reasonably complex restructurings. It is relevant that some 46% of corporate debtors under the guidance of CDRAC have not signed the debtor-creditor agreements and have sought to negotiate simpler debt restructuring arrangements.
A useful innovation in the CDRAC process is that it has been used in some cases to develop pre-packaged plans. This technique is necessary if all creditors are to be bound by a plan (like all the informal processes, the CDRAC process only binds creditors who agree to the plan it does not bind those who dissent nor other creditors who have not been involved in the process). The plan is agreed by a dominant number of creditors through the CDRAC process and the corporation then applies for reorganisation under the insolvency law. The pre-packaged plan becomes the reorganisation plan. All creditors are then involved and required to vote on the plan. If approval from the requisite majority is obtained the plan binds all creditors.
A summary of the main areas that present problems and difficulties are as follows:
From those observations there appear to be three main barriers. The first concerns, among other things, "know how", experience and commercial knowledge. The second concerns the practical problem of providing for the immediate cash flow needs of an insolvent corporation (the problem of "new money"). The third barrier concerns the level of sanction that might both promote and encourage an informal work-out.
It took a considerable period of time for the concept of the informal work-out to be accepted in more fully developed countries. In part, this was because a change in attitude was required, in particular a change from relying only on the employment of strict legal processes. But it only became successful after a considerable period of knowledge and expertise had developed. In the RETA economies there should not be so much difficulty in inducing a change in attitude since, as has been mentioned, in many of the RETA economies there exists already a preference to avoid the employment of strict legal processes. But in some of the RETA economies there is a need for considerable training and education in the manner in which the informal process may be properly conducted. A successful work-out also involves a considerable degree of commercial experience and knowledge in a number of complex areas. These include the restructuring of the financial obligations of a corporate debtor; the possible sale of some of the non core business activities of the debtor corporation; the possible conversion of debt into equity; and other complexities. It is possibly the case that the degree of domestic experience, knowledge and expertise in some of the RETA economies is not presently sufficient to enable those complexities to be fully understood and dealt with. There is, therefore, a need for training and education in this area.
As mentioned previously, none of the insolvency law regimes of the RETA economies provide sufficient protection for the provision of urgent money for working capital requirements. It has been suggested that this is an area that requires further technical assistance in the region. Although there are not, as yet, any precedents for the protection of new money under an informal process, it would be useful, as part of a technical assistance, to pursue the possibility of extending statutory protection to the informal process. (c) The level of sanction Despite the overall appeal and commercial sense of informal work-out processes, the prospect of engaging a corporate debtor and its variety of creditors in such a process will not work unless there is an available sanction in the form of quick and efficient access to the employment of a formal insolvency process. As observed in earlier sections of this report, that sanction does not exist in some of the RETA economies because of problems of access to and the application of the insolvency laws. If an insolvent corporation is unwilling to engage in an informal work-out, it is necessary that creditors are able to take formal individual or collective enforcement proceedings and that those proceedings will be effective. It is only through the existence of such enforcement procedures that the necessary sanction may be applied to an insolvent corporation."
7.14 Conclusions and proposals
Education and training. Further education and training among banks and financial institutions and owners and managers of corporations about the methodology and processes involved in informal work out processes would be desirable. The process is also dependant on the availability of professional and other advisors with experience and knowledge of the processes. There should be education and training courses to encourage the development of these professionals.
Retention of structured processes. The development of the informal process has been extremely important for the region. The momentum must be maintained. Once the systemic debt problem of the banking sectors in many of the economies is arrested, the informal processes should be retained and should not be dismembered. They might be reviewed to ensure that they are capable of dealing with corporate debt problems generally and, in particular, that they take proper account of the important collective characteristics of insolvency practices. It is also suggested that the presence of a facilitating agency to bring debtors and creditors together has clearly been very useful and should be continued.
Regional development co-operation. Given the differences in approach to structured informal work-out processes in the region and the greater success of some above others, it appears desirable to encourage consultation and exchanges of information and experience between the authorities that are involved in the processes. This might be done by facilitating a symposium to bring representatives of the government authorities, of banks, of professional advisers and others together
PART 8
The statistical and other information gathered during conduct of the RETA about the actual operation of the formal insolvency law regimes in the RETA economies suggests that in some of the economies there is a considerable problem regarding the application of the insolvency laws. This part of the report first presents the statistical and associated evidence that identifies the apparent problem of application. It then considers the possible reasons, among which are: problems associated with commencement and processing of formal insolvency cases under the insolvency laws; the absence of or problems associated with other legal processes (which includes issues relating to general legal institutional development); and, finally, attitudes to legal processes generally.
One method to determine the extent of application of the insolvency laws is to review the statistics of the number and types of cases. Normally that type of information should be readily available, since it is an important and relevant economic statistic and can be a valuable indicator of trends in the economic system. Unfortunately, statistics on insolvency cases in many of the RETA economies are either barely sufficient or almost non-existent. However, with the assistance of the local consultants, it was possible, during the initial work under this RETA, to obtain broad details of levels of insolvency cases. The following information was provided to January 1999:
The compelling observation from that survey is that in some of the RETA economies there were no cases of corporate insolvency and only a very few in some others. This is a quite extraordinary position because even in times of economic boom and growth, a number of cases of corporate insolvency may be expected. When considered in the light of the economic conditions that affected most of the RETA economies during 1998, the figures are baffling. In the latter part of the conduct of the RETA, further statistical information was provided from five of the economies ((Indonesia, Thailand, Korea, Malaysia and the Philippines, the economies most affected by the financial crisis. This information, in summary, was as follows (the information is largely for the year 1999): Liquidations
There were no cases of liquidation in the Philippines. In Thailand there were 24 cases of liquidation (or bankruptcy). In Indonesia there were 13 liquidation cases. In Malaysia and in Korea the figures for insolvent liquidations were around the same figures for 1998.
Formal rescue
In the Philippines there were 11 filings for reorganisation in the year 1999. In Thailand, 8 companies filed for business reorganisation. In Korea the figure for cases of formal rehabilitation was expected to be around 160 (to that should be added some 400 cases for composition). In Malaysia there were 20 filings for schemes of arrangement. In Indonesia there were 6 cases for suspension of payments.
Informal rescue
By comparison, in those economies in which a form of structured informal process is available, the level of activity was as follows:
In addition, in those economies and in the Philippines (which does not have a structured informal process) other informal processes operate in the form of private versions of the work-out concept. It is difficult to quantify this level of activity, except by anecdotal evidence. However, the local consultants from the five economies considered that there had been relatively high activity at this level.
8.3 Levels of insolvency activity
Although the level of formal insolvency cases appears to have risen as a result of the effects of the financial crisis, the figures continue to evidence a very low incidence of formal insolvency cases in the courts.
It seems clear that, apart from in Malaysia and in Korea, there has been little resort to the liquidation process. The numbers in Thailand, Indonesia and the Philippines are extraordinarily low. They do not even approach the type of figures that might be expected of corporate businesses in a time of healthy and progressive economic development and stability, which is certainly not the case in any of these economies. The numbers in Malaysia and Korea are not consistent with the economic problems in each of their economies. On any reckoning there must be a substantial number of insolvent corporations for which no account can be given. The figures are baffling and difficult to explain.
There has also been surprisingly little use of the new forms of formal reorganisation processes in Thailand and in Indonesia. This may be due to the relatively recent introduction of these processes into societies in which they were previously not known.
It may also indicate that legal and court controlled processes are not suitable for the commercial culture of those economies, an issue that is taken up in a later section of this Part.
By comparison, the level of informal work-out activity under the structured and private processes has been greater, although even that level is surprisingly low. It appears to be a more acceptable form of process and more suited to the commercial culture of some of the economies.
It is also important to observe that the initiation and operation of the structured informal processes appears to have fuelled and provided the basic guidelines for the development of private style work outs within the banking and commercial sectors. That is encouraging, particularly in economies such as Thailand, Indonesia, Malaysia and Korea, where there had been practically no experience and very little knowledge of informal workout practices.
However, as mentioned in the earlier Part of this Report, it is important to appreciate that the operation of these informal processes is, in some cases, an extension of the repair of the banking and finance sector. It is hoped that the structured informal process will continue to flourish once that repair has been completed.
8.4 Improvement of statistical information
All the country consultants agreed that insolvency statistical and other related information systems must be improved. A summary of some of the views is as follows:
A final observation concerns some statistics from Indonesia. The supplementary local report mentioned that 12 bankruptcy petitions were withdrawn or settled . There is reason for some concern about this because it may suggest that the bankruptcy process is being used as some type of individual debt recovery process. That is not a desirable trend. It may indicate that other commercial processes are ineffective, such as debt recovery and secured property enforcement legal processes. That area is dealt with in the following section. 8.5 Legal systems and institutions As mentioned in various Parts of this Report, a corporate insolvency law is but part of an overall commercial legal system and is heavily reliant for its proper application on, first, a developed and rounded commercial legal system and, secondly, a developed institutional court or tribunal system. The legal systems of the RETA economies differ, in the sense that a number follow a common law system tradition and others a civil law based system. It is sometimes suggested that such a division can result in a considerable difference in the manner in which laws and legal processes are employed. Some attention was given to this aspect by considering, for example, whether there were any real differences between the application of insolvency laws in common and civil law jurisdictions generally. The evidence suggests that there is none or, at least, none of any substance. The issue of the application of the insolvency laws in the RETA countries has, therefore, not had to take account of such a possibility. However, and more importantly, there is some considerable difference in legal infrastructure in the RETA economies. The extent of development of a legal system and the institutions that normally support that development (principally courts, judges and officials) varies considerably between the economies. In the case of some of those economies, economic and commercial development has not always been accompanied by the development of necessary infrastructure foundations. One factor that may contribute to this is that some of the RETA economies have not had a long history of or strong dependence on a legal and judicial system, particularly in the commercial area. In a number of the economies, with the exception of areas of law such as criminal and government administrative law, there has been little reliance upon a legal system and its institutions. This could be due, in part, to cultural and other factors, as mentioned later, notably the preference for non-confrontational negotiation to remedy disputes or problems. Political and government attitudes may also be a contributing factor, especially regarding levels of expenditure to develop and support a legal system and the accompanying institutions. This, in turn, filters down to the qualifications, training, experience and status of judges, judicial officers and the judicial system generally. 8.6 Debt recovery processes As an example, it appears that in many of the RETA economies the process of debt recovery through the court system is long and tedious. The following are relevant extracts from some of the country studies:
8.7 Secured property enforcement processes. A review was also made of security enforcement processes in the RETA economies, since secured transactions and their enforcement is a considerably important part of the commercial law system. Although this is more fully discussed in the Part of this Report dealing with the intersection of secured transactions and insolvency law, it is relevant to mention what that review disclosed. First, in many of the RETA economies, secured property enforcement rights require court proceedings to be taken for an order that the security may be enforced. Further, in some of those economies, after such a court order is obtained, the actual enforcement and sale process of the property has to be undertaken through a government execution or similar agency; The court processes can be very slow. Evidence of that was provided by a number of the local consultants, as, for example:
These factors are strongly indicative of two things. First, they indicate that in some of the economies the court and judicial processes are slow and ineffective. That is indicative that either the court system and infrastructure is not sufficiently developed or there are severe problems in the administration of that system. Secondly, they show that individual creditors enforcement powers are, in some of the economies, greatly restricted, if not, in a practical sense almost non-existent. 8.8 Implications of inefficient court enforcement processes for formal insolvency law processes Indications such as those pose two possible major repercussions for an insolvency law. First, if a corporation cannot pay a due debt, secured or otherwise, it may be assumed, with some degree of certainty, that the debtor is insolvent or fast approaching that state of affairs. If that is so then it is in the interests of all those affected (the creditors, the debtor and its shareholders and management), that the debtor should be required or forced to submit to a form of insolvency administration whether formal or informal and whether liquidation or reorganization. However, it may be expected that a corporate debtor will not willingly volunteer to such a course unless some pressure is applied. The principal source of that pressure will come from the actions of individual creditors who pursue their individual enforcement rights. If the pursuit of those rights is restricted or delayed because of either an inadequate civil court process or other legal process system, there will be no pressure on the insolvent corporation to do anything. As a result the corporation will not usually take any remedial action with the risk that its financial position will deteriorate to the cost and prejudice of persons who transact business with it. Secondly, if the legal system fails to provide efficient and sufficient individual creditor enforcement rights, those individual creditors are likely to seek recourse to the insolvency law. It may appear to provide the only effective means for individual enforcement. However, that results in an unwanted and undesirable use of an insolvency law. 8.9 Application of insolvency court processes. A final consideration in this section is to review actual court processes in the application of the insolvency laws. An insolvency law is a difficult and complex area of commercial law. The experience in many jurisdictions is that it is unsafe to leave the jurisdiction to courts or judges that do not have wide commercial experience. In some of the RETA economies there is a negative reaction toward the use of the insolvency law because of problems with the court and judicial system. The processes are slow, judges are not suitably qualified nor experienced and the judicial process is unpredictable and unreliable.
A review of the performance of the courts in relation to the application of the insolvency laws in the five economies of Korea, Malaysia, Thailand, Indonesia and the Philippines revealed the following:
8.10 Attitudes to strict legal processes The earlier sections of this part of the report have suggested that in many of the RETA economies there appears to be a cultural attitude, particularly evident in the commercial society, which views dispute resolution and problem solving as best suited to non-confrontational negotiation and mediation. Consistent with that, there also appears to be a distinct aversion to the use of strict legal processes (which require a somewhat rigid adherence to legal system organization, function and methodology) for the resolution of commercial disputes and problems. The following extract from the local study of Thailand identifies the type of cultural factor that may be involved: "Thais are characteristically non-confrontational and conflict averse in their approach to business. Negotiation and compromise are the expectation and practice. Litigation is reverted to relatively infrequently &" A similar observation was made in the Indonesian local study: "It is customary in Indonesia for debtors and creditors to try to negotiate a settlement of their debts before formal insolvency procedures are commenced. In part, this is because there was no effective bankruptcy law or the courts were perceived as ineffective in implementing the law. In the past, public litigation was seen as an irreparable breach in the business relationship and which ran contrary to cultural norms in dispute resolution". The existence of such attitudes should not be the subject of criticism. But, if it is correct that attitudes generally in many of the RETA economies are such that there is an aversion to resort to the application of strict legal processes and rules for problem resolution, it may help to explain why, in those economies, the statistics for the in formal insolvency processes are so low. If negotiation and mediation is a successful way of resolving commercial disputes and problems then so much the better. However, there is a problem in the application of negotiation and mediation to the type of problems produced by the insolvency of a corporation. As mentioned earlier, there are multitudes of interests of which account must be taken because it is a collective remedial process. Often these interests are in conflict with one another. An insolvency law regime requires a significant degree of legal system organization, function and methodology for effective operation. It is difficult to suggest solutions to the problems that arise from this. However, the development, as mentioned earlier, of the informal "work-out" insolvency process (which provides, at least, the possibility of a forum for negotiation and mediation) might help to overcome the problem in those countries in which problems of this nature are more critical. 8.11 Problems with the insolvency law Another possible reason for the low statistical numbers is that the insolvency laws themselves pose impediments to their application. As noted earlier in this Report in the assessment of the insolvency law regimes of the RETA economies, some of them make access difficult for both debtor and creditors, particularly the latter, by providing for high, vague or unclear entry criteria. That can both prevent and deter recourse to the insolvency processes. A similar problem can arise in relation to reorganization if the law places too many restrictions on or in relation to a debtor corporation as a consequence of it volunteering for possible reorganization. For example, in some economies there appears to be a strong commercial cultural attitude about loss of control or anything that might result in outsiders dictating the immediate and long-term future of a corporation in financial difficulty. If an insolvency law removes the powers of management from the corporation or excludes a debtor corporation from the initiation of a plan of reorganization, such provisions may militate against the process being used by corporations. 8.12 Conclusions and recommendations It is now necessary to draw these four areas together. Statistical information about formal insolvency processes is rudimentary in many of the economies. That needs to be improved. But, from the statistical and other information that is available, it can be seen that the extent of application of the formal insolvency processes in many of the economies is extremely low. There are a number of reasons that contribute to this. First, there are problems with the legal system generally, particularly regarding the legal processes for individual creditor enforcement processes and, in some cases, the actual insolvency processes. These need improvement. Secondly, in some economies there is a problem because of the lack of development of the court and judicial system generally. That can only be improved by a general revision of court and judicial structures. Thirdly, there are problems connected with particular provisions of some of the insolvency laws themselves. These can be rectified by reform. Finally, there are cultural attitudes toward formal legal processes of which account must be taken because there has been a clear endorsement of informal insolvency processes. Each of these areas is now briefly addressed. 8.13 Statistical information It is important that there is readily available statistical information about insolvency. The number of cases of formal insolvency administrations is a relevant economic statistic. This can be a valuable indicator of trends in the economic system. It is also relevant to ascertaining the impact of commercial practices on different sections of the commercial community. It can also be a helpful guide to the possible need for reform to the law. The following proposal is advanced for consideration and adoption in all of the RETA economies. Statistical information on corporate insolvency should be published by the responsible authority on a quarterly basis with a yearly summary. It should provide details of:
Upon the completion of each corporate insolvency administration, the responsible authority should record the following information for public access:
The process of gathering and recording statistical insolvency information should be also extended to informal processes, particularly those that are under the guidance of central bank or other government agencies.
The need for anonymity in informal processes can and should be respected, but general information on aggregate numbers, assets and liabilities, industries and causes of financial difficulty might be easily provided in the form of an annual report.
Banks and other financial institutions might also be encouraged to provide relevant broad and anonymous data to the same effect, since they will be involved in many more private informal workouts.
There is also a need for reports, writings, opinions and critical analyses of insolvency cases and on the operation of the insolvency law system.
8.13 Legal processes and the courts
There are a number of matters to consider.
First, the issue of court processes in relation to the enforcement of individual creditor rights. In the economies in which such processes are inefficient there is a warped commercial environment that might be concluded as being debtor friendly . That can only produce concern among financiers and investors. More importantly, it does not respond to economic expectations and commercial needs. This is possibly most marked in the area of secured property enforcement, which is more fully developed in Part 10 of this Report. There is a need for considerable improvement of court and related processes in the economies most affected by these issues.
In relation to the application of the insolvency law regimes, the reports of the local consultants all appear to underline the need for specialised courts (or divisions of courts) and judges with experience and knowledge to handle insolvency cases. A specialised court need not be one that is solely devoted to cases of insolvency. It may be one with a broad commercial jurisdiction, of which insolvency is a part.
The need is for judges who are capable of dealing with cases of corporate insolvency. That requires wide knowledge and appreciation of economic, commercial and corporate affairs. In some of the economies, training and education in those areas would be of considerable benefit. A high priority should be accorded for intensive and ongoing education and training of judges and court officials in those economies.
Another area in which assistance might be appropriate (although it is an area that is clearly outside the scope of this project) is in the organisation of the courts, the status and general accountability of judges and court officials.
Case management of corporate insolvencies
The RETA has revealed that many of the economies lack trained and experienced people to administer cases of corporate liquidation and reorganisation. That is understandable when the pre-crisis statistics of insolvency cases are considered, because in some of the economies there were no cases of corporate liquidation or reorganisation. However, the number of corporate insolvency cases are now beginning to greatly increase as the corporate fall out from action taken within the banking sector begins to take full effect. In Thailand, for example, more than 1000 corporate insolvency cases are expected in the near future.
There are two categories of case managers for whom training and education has become vital. The first is in the government department or agency that is expected to administer corporate liquidation cases. Here the need is for considerably greater resources to ensure that the department or agency is managed and staffed by capable people. The functions of such an agency include such important things as taking possession of and securing assets; winding down business operations; assessment and verification of claims of creditors; valuation and sale of assets; recovery of proceeds from fraudulent and other transactions; and distribution of proceeds and dividends to creditors. Training and education in these areas is of considerable and immediate importance in many of the economies.
The second category of case managers may be expected to come largely from the private sector. These will be professional insolvency administrators whose functions are primarily directed at cases of reorganisation. The functions that they may be expected to perform include pre-insolvency investigative and analysis work; management of the business of a financially distressed corporation; collection and presentation of financial and accounting information concerning the corporation; preparation of reorganisation plans; assessment of plans of reorganisation; implementation of a plan of reorganisation. They might also be expected to be additionally involved in performing the functions of liquidators, as mentioned above.
In many of the economies this category of insolvency case manager has commenced to emerge, but in most cases it is comprised of people who have had limited experience and knowledge. There are moves to form professionally based associations. Some governments have or are contemplating the imposition of licensing and other qualification requirements with the aim of encouraging the development of a strong professional group of private case managers. These initiatives deserve encouragement and assistance by the provision of training and education schemes.
PART 9
OTHER INFLUENCES AND CONSIDERATIONS IN THE OPERATION OF THE INSOLVENCY LAW REGIMES
The corporation is widely utilised throughout the region for trade, commerce and the conduct of business, particularly for the conduct of medium to large business activities. Whilst the corporation has been long recognised as the most convenient and appropriate form of business organisation for the conduct of that size of business, it has been also long acknowledged and accepted that the corporation is a form of enterprise that is open to management and other abuse. Adequate external and internal controls are necessary.
Most of the RETA economies apply a broadly similar regulatory system in prescribing the formalities to establish and thereafter conduct and operate the business of corporations. For example, all corporations:
However, there is considerable divergence in the application of such regulatory standards. 9.3 Accounts and accounting standards In the context of insolvency, the proper construction and maintenance of accounts and accounting information in relation to a corporation serves three important purposes. First, it provides a warning of the onset of financial difficulty and thus serves an important internal purpose. Secondly, it can be important externally as an information system to financiers and suppliers. Thirdly, it can be crucial to the prospect of rescue or work-out because it should provide information to existing investors and lenders to enable them to determine a plan of rescue and to answer the inquiries of potential investors, purchasers or financiers. A review of the requirements relating to accounts and accounting information of large and medium sized corporations in some of the RETA economies suggests that although there is considerable importance attached to the concept and form, the reality and practice is otherwise. These following extracts from the some of the local studies are informative. Pakistan: "...the quality and accuracy of information [contained in the financial statements of a corporate borrower] varies". It would probably not be complete nor accurate". India: "Depending upon the extent of the industrial sickness and the accumulated arrears or losses, it is likely that the records of the company would be in disarray....". Thailand: "Auditing standards have come into question recently with the economic crisis....." It is unlikely that the financial and other information regarding the corporate borrower is complete and accurate (particularly regarding the valuation of assets and the assessment of liabilities)". Philippines: ".... Unless such financial statements come from a reputable accounting firm... they may not be giving the true state of affairs of the corporate". Japan: "Some recent bankruptcy cases have revealed that management had made false accounting to conceal bad financial conditions of the company". Indonesia: "In general... [there is] .. a lack of sufficient financial information. ...The completeness and accuracy of the information ...depends on the integrity of the management of the company". Hong Kong, China: "...the frequency and standard of [financial reporting] is often less than in many Western countries". It seems clear that the imposition of proper accounting standards is required in many of those economies, together with an adequate regulatory authority that is able to police the application of those standards.
Directors of a corporation are ultimately responsible for proper management. In some jurisdictions this responsibility has been taken to such lengths as imposing a duty on directors not to permit a corporation to engage in insolvent trading and, even, to take affirmative action once it is apparent that the corporation is insolvent or will soon become insolvent. Duties such as these become part of a "code" of corporate governance standards and can be a considerable aid toward encouraging a corporation in financial difficulty to take early affirmative action by voluntarily submitting to a formal or informal rescue process. Attitudes toward the proper role of and standards under which directors should operate vary among the RETA economies. In many cases it seems that many "directors" are either bare nominees or are controlled by others. This alone suggests that standards of corporate governance responsibility are either far from developed or considered to be of not much consequence in some of the RETA economies. The Hong Kong, China local study, for example, observes that: "....it is not uncommon for listed companies in Hong Kong, China to be under (extended) family control and for there to be a lack of genuine independence even amongst non-executive members of the board of directors. ....Many local companies do not have independent managers - or if they do, have brought in the managers to raise money rather than to impose financial controls - so the controlling family often does not hear contrary views being voiced by senior managers within the company". In Korea something similar is evident. There is a requirement that a corporation has a minimum of 3 directors. However, private ownership or proprietorship or control of a corporation is culturally and commercially important in Korea, and it seems that, in many cases, two of the three directors will be mere employees of the corporation. The third will be the owner or proprietor. The two employed directors will rarely, if ever, play any real part in management of the corporation. It appeared to be the case that standards of corporate management in many of the economies in the region were defective for one or more of a number of reasons. Examples included:
This is not an area that can or should be regulated by an insolvency law. However, it cannot be ignored because, most importantly, an insolvency law system cannot be expected to operate and produce positive results in an environment of inadequate corporate governance and financial irresponsibility. Weaknesses in this area result in considerable havoc to any form of insolvency law endeavour. It cannot be emphasised sufficiently strongly that continued reform in this area is absolutely vital.
An analysis of these difficulties has been provided by some of the local studies, as follows:
Korea
The Korean local consultant suggested that concentration on the following areas would be helpful to lessen or eradicate these problems:
Malaysia
In Malaysia, the important issue of corporate governance has in fact been addressed, in part. A recently published Code on Corporate Governance is the result of the work of a committee under the initiative of the Minister of Finance to establish industry standards of best practice. It covers such things as appointment of directors, compositional balance of a board of directors, supply of information, communication between company and shareholders, financial reporting, internal controls and the relationship between the board and the external auditors.
As regards the presence of independent directors on the board of a large corporation, the Corporate Governance Code requires that a board of directors be composed of at least one third outside independent directors.
There has also been much greater attention given to the prosecution of corporate governance offences in Malaysia.
However, despite these welcome and important advances, problems still exist in Malaysia. The chief concerns are with:
Thailand
The Thailand consultant commented that the application of what are termed traditional Thai methods and values of governance is still more influential than the law. These methods and values pay little or no regard to the more sterner and exacting methods and values prescribed by law and regulation. The consultant pointed out that in Thailand the relevant laws or regulatory requirements exist. However, those laws are not applied nor enforced.
The main areas of concern are these:
Despite this, the consultant for Thailand pointed out that there are signs that a combination of the new Constitution of 1997 and the need for austerity following the economic crisis is creating a more transparent, fairer and less abused corporate governance environment.
Philippines
In this jurisdiction the areas of concern are:
The view of the Philippines country consultant is that legal guidelines on director duties and responsibilities are essential and the law should provide sanctions for breach and enforce the application of those sanctions.
Indonesia
Some attempt has been made to ensure greater transparency in the contents of annual financial accounts that some particular classes of companies are required to prepare and file. Regulations made earlier this year require disclosure of financial and cash flow reports. This should provide for greater corporate disclosure and more opportunity to access financial information. However, two matters, identified by the Indonesian consultant, might tend to limit the effectiveness of these regulatory requirements. First, only 6% of companies have submitted annual accounts. Secondly, many classes of companies are exempt from the obligation.
New anti-corruption laws have been enacted. Although not specifically directed to the corporate sector, they each assume a likely patronage or corrupt commercial link between corporations and government officials and others.
The problems of corporate management in Indonesia appear to be mainly centred upon corruption, non-enforcement of regulatory requirements regarding accounts, and inadequate laws concerning director duties and responsibilities.
The Indonesian local consultant considered that two things in particular would greatly assist in raising standards of corporate governance in Indonesia. First, the enactment of legal guidelines on the duties and responsibilities of company directors together with sanctions for abuse or breach. Secondly, the establishment of an independent supervisory board with powers to control corporate practice in Indonesia would do much to help develop the application of corporate governance. The vision is of a regulatory board that would act as an alternative means of law enforcement on business practices. It would act as an investigator body with power to report breaches to the courts and recommend enforcement.
Training and education for directors and managers
The local consultants were asked whether education and training programs for directors and managers might be of benefit.
The Thailand report considered that this would benefit only directors who might be ignorant of their responsibilities. The real problem lies with directors whose conduct is deliberate or wilfully neglectful.
The Malaysian report considered that many directors are ignorant of proper corporate governance in the areas of financial management and responsibility for which education and training is required. Further, it is considered that directors should be educated on the recognition of creditors rights, the mechanics of a work out, the initiation of work-out processes and the need for correct, up to date information concerning the company.
The Indonesian report considered that such a program would be helpful. The Company Law provides no or no sufficient standard of performance for officers of a company.
9.5 Conclusions and proposals
It seems apparent that, with one or two exceptions, there are fundamental weaknesses in corporate management in many of the RETA economies. The areas of weakness are:
It is not appropriate in the context of this Report to suggest proposals for detailed corporate governance and management. However, for the reasons stated earlier, it is appropriate and necessary | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||