 |
|||||
 |
|
||||
|
||||
|
SECTION 1 - INTRODUCTION 1.1 Subject of Study A market economy (or anything approaching it) would not exist without private investment. This investment is financed either by capital or debt funding. The corporation is the vehicle through which the great majority of private investment is achieved. A common way of financing the investment activities of most large and medium size corporations is by debt funding. The banking sector is the primary source of debt funding. Debt funding (albeit more indirect) is also provided, however, through many other sources. Lease financing is one such source. Another is through suppliers of goods and services to corporations. Normally these are supplied on credit. Debt funding is even provided by employees. They may be expected to work before they are paid and to accumulate leave and other entitlements before they receive the benefit of them. Viewed in that way, their services are supplied on credit. Taxes for which a corporation is liable also usually accumulate over a period of time. Not surprisingly, therefore, a typical large or medium sized corporation is likely to have, at any one time, a considerable debt burden. The businesses and finances of corporations, both large and small, suffer, at times, as a result of the impact of one or a number of factors. These range from internal factors (such as bad management and fraud); extended internal factors (such as product liability, market or product change and competition); to external factors (such as industrial action, micro and macro economic conditions). Whatever the cause, the corporation is soon in financial difficulty. It struggles to meet debt servicing requirements. It may attempt a variety of remedial actions. Most of this is internalized. Few within and even less outside of the corporation know what the situation is. Finally, the weight of debt becomes too much. The corporation becomes insolvent. It cannot pay debts as they fall due; its liabilities exceed its assets; and it has a cash flow/liquidity problem. What then happens? A clash of values occurs. One involves support for the basic principle that the making of a loan or the provision of credit carries with it a promise, in the form of a contractual obligation on the part of the debtor, to repay the loan or pay the debt. The exercise of individual remedies to enforce that promise becomes important. As a result enforcement actions may be commenced. Secured creditors might seek to control and realise secured property. Unsecured creditors may take debt recovery actions. However, support for the principle of enforcing the promise to
pay is affected if, in all the circumstances, it is impossible
to fulfil the promise. This is the usual consequence of corporate
financial difficulty and insolvency. As a result support for another
value becomes important - that of an ordered, collective process
to protect against the disorder and unfairness which might result
if the exercise of individual remedies was permitted to continue
unchecked. The onset of actual or potential insolvency on
the part of the debtor can lead to negotiations between the corporation
and its lenders. An informal "work-out" might be proposed.
Ultimately formal insolvency procedures might be commenced. This preliminary report presents the results of a study, based on eleven Asian economies, of this inter relationship between corporate debt recovery and corporate insolvency. The eleven economies are Japan, Korea, Hong Kong, China, Thailand, the Philippines, Malaysia, Singapore, Indonesia, India, Pakistan and Taipei,China. These are referred to collectively as the "RETA economies". On that subject the report seeks to identify, observe upon and estimate similarities and differences in the eleven economies regarding corporate debt, debt recovery and corporate insolvency. The report also seeks to develop key areas for discussion and critical evaluation with the eventual prospect of framing a "best practices model" for consideration and possible application in some of the RETA economies. The project was led by Mr Ron Harmer, a consultant to Blake Dawson & Waldron, Solicitors in Paris, and managed by Mr John Lees, a Partner of Ferrier Hodgson & Marfan, Certified Public Accountants in Hong Kong, China. The report is based on studies conducted in each RETA economy by specialist domestic consultants (the “local consultants”) and field visits to each RETA economy (the "local studies"). The local consultants participating in the project are as follows: Hong Kong, China Mr Charles D Booth Associate Dean & Associate Professor of the Faculty of Law University of Hong Kong, Faculty of Law India Mr Shardul S. Shroff Senior Partner Armarchand & Mangaldas & Suresh A. Shroff & Co. Indonesia Mr Darrell R. Johnson Senior Foreign Legal Advisor Soewito, Suhardiman, Eddymurthy & Kardono Japan Mr Jinya Yashige Partner Braun Moriya Hoashi & Kubota Korea Mr Soo Chang Kim Partner Lee and Ko Malaysia Mr Rabindra Nathan Partner Shearn Delamore & Co. Pakistan Ms Amna Piracha Partner Khan & Piracha Philippines Mr Teodoro Regala Founding Partner Angara Abello Concepcion Regala & Cruz Singapore Mr Sarjit Singh Gill Partner Shook Lin & Bok Taipei,China Mr Y. D. Den Counsellor (equivalent to Partner) Lee Li Thailand Ms Punjaporn Kosolkitiwong Director and Head of Litigation Department Dej-Udom & Associates Ltd The origins, detail and methodology of the project leading to this report are contained in Annex 1. 1.2 Contents of Report and further development of Project The report is divided into 10 substantive sections. Most of these sections contain a general survey of the position in the RETA economies regarding the subject matter of the section. The report does not examine the position in each economy in detail. The local studies contain that greater detail. There is an extended discussion in section 2 of what might be regarded as typical basic elements of a corporate insolvency law and practice regime. A similar discussion appears in section 3 in relation to informal corporate insolvency practices. Issues arising for discussion are identified together with tentative proposals of the best practices model. Some of the processes and an outline of rescue laws in the RETA economies are presented in graphic form in Section 13. A summary of the issues and tentative proposals completes the report. The report, together with the local studies and accompanying legislation and other material, will be discussed at a symposium to be held at the headquarters of the Asian Development Bank, Manila, Philippines on 25-26 January 1999. It is expected that this discussion will result in amendments to this report and will help in the framing of the best practices model. It is for this reason that the references in this report to suggested components of the best practices model are tentative only. Finally, the subject will be revisited at the end of 1999 by updating the local studies, this report and convening a further symposium in Manila. 1.3 The Asian Economic crisis and its relevance to this study Most of the RETA economies have been affected by the economic crisis of East Asia. The purpose of this study, however, is not to focus solely on
the effects and consequences of the economic crisis nor to contemplate
or propose immediate or rushed solutions to the many problems
presented by it. The study has the very much broader and long
term aim of encouraging the greater development of legal and commercial
systems, practices and institutions for application in all economic
circumstances. But, that said, there probably has not been
a better time nor a better environment, unhappy and painful though
the economic difficulties may be, in which to focus on the subject
of this study. Eighteen months or so ago, the prospect of engaging many of these economies in discussions concerning the prospect of insolvency law and related reform may not have been treated seriously, such was the buoyant nature of many of the economies in the region. Now, however, there has been dramatic economic change and the legal and commercial institutions and practices relating to debt funding, recovery of debt, security enforcement and the application of both formal and informal insolvency techniques are the subject of critical scrutiny, study and possible correction. It is an ideal time to use those circumstances to advantage and promote the future of this particular study. 1.4 Reform Efforts One of the positive things that has occurred in many of the RETA economies that have been worst affected by the crisis is that the process of law and commercial reform has already commenced. In relation to the subject of this study some considerable progress toward reform of the insolvency law has occurred in RETA economies such as Indonesia, Thailand, Korea and Malaysia. There are proposals in Hong Kong, China for extensive reforms to corporate insolvency law. Some RETA economies have adopted short-term special legislation to deal with particular aspects of the crisis (for example, in the banking sector). In addition, six of the RETA economies have commenced the promotion of semi official informal work-out processes in relation to insolvent corporations which have large debt exposure to banks and other financial institutions. These initiatives have done much to foster and encourage the prospect of long-term insolvency law and related reform and development in the region. 1.5 Identification of critical areas of study In this report (and, more particularly, in the local studies), a number of areas are included for background or information purposes but they are not the subject of extended discussion. There are areas of the study which are clearly relevant and warrant critical evaluation, discussion, and possible reform development. There are other areas which, for various reasons, are not appropriate for that process. This might be best illustrated by an example from the subject of secured lending. It is relevant in the context of this study to examine secured lending. That examination, at least for information purposes, should include:
However, the third area, that of security enforcement, is relevant and is subject to some critical evaluation in this study. 1.6 Standards and judgments As mentioned, it is intended that a series of elements that might be suitable for a best practices model for dealing with the problems of corporate debt recovery and corporate insolvency should ultimately be presented. This necessarily involves selection of a standard by which some judgment might be made, measurement obtained or opinion expressed when reviewing laws and practices in the RETA economies and proposing elements of the model. If some such standard is not selected much of the discussion of the subject would occur in a vacuum. This report proposes that basic standards be determined by reference to well established and accepted policies and principles which are evident in the corporate insolvency regimes and related practices of many more fully developed countries. This proposal may possibly attract the criticism that this is tantamount to, in effect, suggesting that such laws and practices be imported into a region which may be far from willing or, even, capable of accepting and applying them. One might also be accused of seeking an excess of homogeneity or of seeking to further expand the spread of globalisation, unwisely and unnecessarily. Even the fact that one of the RETA economies, Singapore, has a modern insolvency law regime, which might be used as a suitable standard in itself, may not avert or deflect that criticism because much of that regime is based on the laws of more fully developed economies. Those criticisms might be answered by the following. First, the insolvency law regimes of more fully developed countries are not all that common between one another. They vary considerably. Proposals or suggestions about the benefit of harmonising those insolvency laws (to obtain something approaching a model “universal” insolvency law regime), while attractive in theory, have never overcome the problem of substantive real and practical differences between the regimes. As a result, any debate on which type of insolvency law regime is best or better so as to emerge with some type of model standard is relatively useless. Nonetheless and secondly, it is possible to identify in these regimes some reasonably common basic policies and principles of approach, even though their application in legislation and actual practice varies considerably. This suggests that it is not a difficult task to spell out the basic policy framework of a commercially acceptable insolvency law regime which appears reasonably suited to application in a market economy. The addition of sensible pragmatism should make it possible to also set out desirable standards of practice and procedure. Thirdly, it should also be observed that the backdrop or environment in which most corporate insolvency law regimes operate (or are supposed to operate) is relatively similar. For instance, they are all directed at corporations; they have to take account of the fact they compete in a market economy and engage in trade and commerce; that corporations engage in debt funding and secured lending; that there is a complex commercial structure in which the corporation functions; that corporations have employees; that corporations are liable for taxes; that corporations are governed by directors whose standards of conduct may vary, to mention but a few factors. |
||||
|
|
