SECTION 7 - THE FORMAL CORPORATE INSOLVENCY LAW REGIMES OF THE RETA ECONOMIES

7.1 Introduction

Each of the RETA economies has an insolvency law regime. In most cases it is possible to detect that significant parts of each regime have been imported from or based upon models in other countries. Thus, for example, the corporate liquidation (or winding up) laws of Hong Kong, China, Singapore, India, Pakistan and Malaysia have been modelled on English (or in some cases Australian) law. The Indonesian bankruptcy law (which, when applied, can lead to a liquidation) has come from Dutch law. Some of the Japanese insolvency processes may be traced to German then, later, American influence. Elements of the insolvency law of Korea resemble those of Japan. Taipei,China, has a liquidation (bankruptcy law) which, although initially applied in and then brought from mainland China, has elements of civil code origins. The Philippines insolvency law regime contains elements of American influence. The judicial management (rescue) law of Singapore has elements of English and Australian law behind it.

On the surface this presents something of an admixture. However the actual processes are not all that different nor is the basis upon which they supposedly operate all that different from the suggested elements of the "model" insolvency law regime described earlier.

7.2 The liquidation process in the RETA economies

(a) Coverage

The insolvency law regimes of the RETA economies all provide for a liquidation process in respect of an insolvent corporate debtor. In the majority of cases the liquidation process is contained in separate legislation (usually termed bankruptcy act or law).

(b) Application

The application of some of the liquidation laws extend to banking, insurance and securities corporations (for example, Indonesia and Thailand) but the access of those corporations to the liquidation process is governed by the consent or authority of a regulatory body.

(c) Access

Access to the liquidation process in the RETA economies for an insolvent corporate debtor is generally easy and uncomplicated. In Thailand, however, it is not possible for an insolvent corporate debtor itself to apply for liquidation.

In a number of jurisdictions there is a process, in addition to a court sanctioned liquidation process, which enables an insolvent corporate debtor to be voluntarily liquidated through simple administrative actions (see, for example, Hong Kong, China, Singapore, Malaysia, India and Pakistan). Of these, that of Singapore offers the easiest and most uncomplicated process.

The ease of access for a creditor of an insolvent corporate debtor varies. In the Philippines, for example, it is necessary that at least three creditors join together to make an application against a corporate debtor. In Japan a possible barrier exists because there is no easy nor convenient method for a creditor to prove that a corporate debtor is insolvent.

Each of Hong Kong, China, Singapore, Malaysia, India and Pakistan offer relatively easy access to creditors. There is little or no evidence of any abuse of the liquidation process as a result of the ease of access in these jurisdictions.

(d) Single/dual process

In most jurisdictions, once the liquidation process has been initiated, there is little or no opportunity for a rescue attempt to be made in respect of the corporate debtor. That may not be of any real concern because very few corporate debtors might be able to fashion a rescue from a liquidation (cf. Indonesia which offers the chance of a "composition"). However, it may be of some concern that in a number of jurisdictions there is no provision which enables the rescue process to be converted into the liquidation process if either the rescue process falters or has failed. For example, in Hong Kong, China, India, Malaysia, Singapore and Pakistan there is no conversion process.

(e) Effects

All of the regimes provide for a stay or suspension of actions, normally confined to unsecured creditors thus leaving secured creditors unaffected. In Malaysia some recent legal opinion indicates that the commencement of the liquidation process may interfere with self help enforcement of a security over land (at least so as to require a court order to effect a sale of the land). In India it appears to be the case that the commencement of a liquidation process brings all security enforcement proceedings to a stop and they are transferred to the court in control of the liquidation proceedings.

(f) Administration

In general, the procedure which eventuates after the liquidation process has been accessed is similar in most jurisdictions in the RETA economies. There are, however, some notable differences in procedure and functionaries. One of the most striking differences concerns the actual administration of the affairs of the corporate debtor. All the jurisdictions provide that the liquidation of a corporate debtor be conducted by an administrator but they vary considerably as to the identity and qualifications of the institution or person who is to conduct or administer the liquidation.

7.3 The rescue process

(a) Coverage

All of the RETA economies have a rescue process. Some RETA economies have more than one. Japan, for example, has three separate types of rescue process under three separate laws. Korea, Taipei,China, Malaysia and Singapore each have two separate rescue processes.

Some of the rescue processes are of very recent origin (for example, the PDNB Act of Malaysia, the amended bankruptcy act of Thailand and the amendments to the bankruptcy law of Indonesia). It is difficult to judge their operation because there are, as yet, few instances of completed cases.

The following is a table of the rescue processes in the insolvency laws of the RETA economies:

(i) Scheme of arrangement - Hong Kong, China, Singapore, Malaysia, India and Pakistan

(ii) Judicial management - Singapore

(iii) Sick Companies - India and Pakistan

(iv) PDNB scheme - Malaysia

(v) PD902A Corporate reorganisation - Philippines

(vi) Corporate reorganisation; composition - Korea

(vii) Corporate reorganisation; company arrangement; composition; - Japan

(viii) Company reorganisation; composition - Taipei,China

(ix) Business reorganisation - Thailand

(x) Suspension of payment/reorganisation - Indonesia

These are now briefly considered in turn. A summary of them is presented in Graphic 4.

(i) Scheme of arrangement - Hong Kong, China, Singapore, Malaysia, India and Pakistan

This is a formal procedure which provides for the possibility of effecting an arrangement and compromise between an insolvent corporation and its creditors. It has long been part of the company legislation of England and of the RETA economies mentioned above. Except in Malaysia it is little used, mainly because of the formalities, cost and time involved. The procedure is cumbersome and, except possibly in Malaysia, there is insufficient protection for a corporation from its creditors, particularly secured creditors, during the lengthy process. In short, it lacks the essential elements of a modern rescue process. It is no doubt for these reasons that there is a government proposal for a completely new law in Hong Kong, China (the detail of this is in the Hong Kong, China local study). There is some suggestion of a similar proposal in Malaysia. Singapore has already created a new rescue process.

(ii) Judicial management - Singapore

This is an example of a modern rescue process. It enables a company in financial difficulty (or a creditor of such a company) to apply for the appointment of a judicial manager. The application is made to a court. The court must be satisfied that there is a prospect of effecting a proposal between the company and its creditors which would provide for the rehabilitation of the company or, at worst, would be more beneficial to creditors than if the company was liquidated. A judicial manager (an independent private insolvency administrator specialist) is appointed and has all the powers of management of the company. The management of the company is effectively displaced. A stay or suspension of actions and proceedings against the property of the company becomes immediately effective. The process may, however, be

completely defeated by a creditor who is secured over all the assets of the company (via the device of the floating charge). Some might regard this as a weakness in the process (cf. England, Canada and Australia). The judicial management order remains in force for a period of 180 days. The judicial manager must present a proposal for consideration by creditors within 60 days (the time periods can be extended by order of the court). A meeting of creditors determines whether to approve the proposal. A proposal is approved if the majority in number and value of creditors (present and voting) accept the proposal. If the proposal is rejected the judicial management process is terminated. There is no automatic conversion to liquidation which may be a weakness. If the proposal is accepted it is the task of the judicial manager to implement the plan.

Throughout the process the court has a supervisory role and creditors have a right of application to the court.

(iii) Sick Companies - India and Pakistan

The treatment of an insolvent corporation in India was and remains largely dealt with by liquidation. In the 1980's, however, it was recognised in India that a law such as this was not meant and was not able to deal with the systemic problems of financial disability, particularly in the state-owned industrial sector. In the absence of any alternative, enterprises in financial difficulty lived on until they were eventually forced to cease production, close down and be liquidated under the law. In the industrial sector of India this had a number of repercussions. It could lead to a shortage of supplies in important or critical economic areas; it could have a "domino" effect on other enterprises; and it led to extensive unemployment. In 1981 a special committee was appointed to examine the difficulties encountered in the rehabilitation of enterprises in financial difficulty and to suggest remedial measures, including changes in the law. The work of the committee was largely focused on industrial enterprises whose financial affairs might be aptly described as "sick". The definition adopted for such a "sick" industrial enterprise was one that has incurred losses in consecutive years and whose asset to liability ratio had deteriorated to below a minimum nominal standard of 1.1.

The committee recommended that special legislation was needed to enable speedy and effective action be taken for the rehabilitation of sick "units" by the creation of a specialised body devoted to their possible revitalisation.

As a result, in 1985, the Sick Industrial (Companies Special Provisions) Act was enacted. Under that legislation a Board for Industrial and Financial Reconstruction was established. The board was given powerful administrative powers. Under this legislation a "sick" company is required to report its condition to the board within 60 days of finalising its audited accounts. In addition, banks and other financial institutions to whom such a company is indebted have the power to make a report on the company to the board.

Once the company is reported a moratorium or stay takes effect which prevents civil proceedings or other action from being taken against the company or its assets except with the consent of the board.

The board is required to conduct an enquiry into the financial position of a reported company and determine whether the company might, within a reasonable time, recover; whether a scheme of rehabilitation should be proposed; or whether it should be liquidated. The board may compel liquidation by requiring that the relevant court make an order to that effect under the relevant insolvency law.

There appears to be very little or no formal involvement of creditors in this process. Whether there is informal involvement of creditors is unclear.

The Companies Ordinance (1984) of Pakistan contains special provisions dealing with the "rehabilitation of companies owning sick industrial units". They are much less elaborate than the comparable Indian provisions. The Pakistan provisions apply to a company which "is declared as a sick company by the Federal Government". The legislation enables such a company to submit a plan of rehabilitation for approval to the government; for the plan to be notified to creditors; and for the government to approve and arrange for implementation of the plan. If the plan is approved by the government it becomes binding on all persons. Again, there appears to be no involvement of creditors.

(iv) PNDB Scheme - Malaysia

The Pengurusan Danharta Nasional Berhad Act was enacted in 1998. This legislation established a government controlled corporation which is empowered to acquire debt owed by insolvent companies to a bank (and the assets of those companies, if they are secured to the bank) and to sell and otherwise deal with those assets. The powers of the government corporation also extend to appointing a special administrator to a corporate debtor (ie. a corporation which is indebted to the government corporation as a result of the acquisition of a debt as mentioned above) which is shown to be insolvent. The appointment of a special administrator results in a moratorium over all the property of the insolvent corporation and permits the administrator to propose a plan in respect of the corporation. The government board may approve or veto the plan. If it is approved a meeting of creditors must be convened to seek a majority vote on the acceptance of the plan. If the plan is accepted by the creditors, it becomes binding and it is then implemented under the direction of the special administrator.

This is possibly a better example of a special insolvency process but is included here because it does resemble a "rescue" regime. It is instructive that it is done through an administrative body. It also enables an insolvent corporation (by a somewhat convoluted means) to be forced into possible rescue or liquidation.

(v) Presidential Decree 902A - Philippines

A procedure of rescue known as "suspension of payments" which is provided for under the insolvency law of the Philippines has now been largely subsumed under the jurisdiction of the Securities and Exchange Commission. A presidential decree gave the commission jurisdiction to receive and deal with applications by corporate debtors for suspension of payments. This has now become the preferred "rescue" process in the Philippines. In effect, a corporation files a petition, a provisional suspension order is made, creditors are notified of the petition and the Commission may then appoint a management committee and rehabilitation receiver. Once such an appointment is made there is a stay or suspension of actions against the corporation. Control of the corporation passes to the management committee or rehabilitation receiver. The management committee, however, will normally include representatives of shareholders of the corporation.

A proposal must eventually be put for the rehabilitation of the corporation. If such a proposal is not made or if the Commission refuses it, the Commission may order the liquidation of the corporation. Although there are no specific rules providing for the involvement of creditors in this process, as a matter of practice it seems that a rehabilitation plan would be referred to a meeting of creditors for comment. However, the ultimate decision is that of the Commission.

This process is quite remarkable for a number of reasons. In effect, it has shifted what was once a judicial process into a quasi- judicial process. There appear to be few, if any, but the most basic rules to govern the process. It gives the appearance of being far from a transparent process. The involvement of creditors appears problematic.

It should be noted that there is a proposal in the Philippines to amend the law and transfer jurisdiction over rescue cases from the Commission to the regular courts.

(vi) Corporate reorganisaiton; composition - Korea

In Korea there are two forms of rescue process. 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. A meeting of creditors considers and votes for the approval or otherwise of the composition. If the composition is not approved, the corporation cannot be transferred to a liquidation process. The management of the corporation continues in power. It appears that an agreement must be reached for the debtor to perform its debt obligations in full.

The corporate reorganisation process is provided for under the Company Reorganisation Act. This differs from the composition procedure because it is aimed toward reorganising or rebuilding a debtor corporation. Under the reorganisation process the company makes an application to a court which then determines if the reorganisation 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 time table is set for the submission of a reorganisation plan.

A reorganisation 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 authorise the reorganisation plan to be implemented. The implementation of the plan is under the control of the receiver.

(vii) Corporate reorganisation; company arrangements; composition - Japan

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 is 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. The plan is then considered by unsecured creditors. 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 corporate reorganisation process 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. Because there is no automatic stay or suspension, an application for an interim stay is made at the same time. 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. As a result 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 information concerning the corporation is given by the trustee and management. 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 quarters majority of secured creditors and a majority of shareholders.

The plan must also be sanctioned by the court. If the plan is not approved the corporation will normally be liquidated.

(viii) Company reorganisation and composition - Taipei,China

In Taipei,China the position is similar to that in Korea and Japan. However, 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 process may be commenced by the corporation, shareholders or creditors. 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.

A composition may be initiated only by a debtor corporation. A composition plan is prepared which is then considered by the creditors. 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.

[One of the problems that is common to the reorganisation procedures in Korea, Japan and Taipei,China is the delay between the filing of the application and its acceptance by the court. There is a process of inquiry and consultation at this vital stage. This would seem to be part of a negotiation/mediation process, facilitated by the court and its officials, to determine attitudes toward and support for a possible rescue. Viewed in that way it may be a valuable part of the process, despite that it delays the real commencement of the rescue and is not accompanied by automatic and immediate effects.]

(ix) Business reorganisation - Thailand

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. An application may be made for business reorganisation either by a debtor corporation, a creditor of a debtor corporation or the respective regulatory authorities of the banking, insurance and securities sectors.

A request for reorganisation is filed with a court which determines 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 government official (the official receiver) is given the legal authority to manage the affairs of the corporation; interim managers may be appointed to perform that task under supervision of the government official. All the assets and property of the company are in the control of the government official. A plan of reorganisation is prepared by a "plan preparer". The plan must be prepared within three months of the appointment of that person 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 plan must then be approved by the court.

(x) Suspension of payments/reorganisation - Indonesia

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 it is approved by creditors, the plan takes effect. If a plan is not proposed the "insolvency" of the debtor is confirmed and 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.

7.4 Conclusion

The above survey reveals that most of the RETA economies possess the basic elements of a typical insolvency law process (at least when viewed against the standard set by the "best practices" elements). But, clearly, some depart from the model and might benefit from substantial reform. However, the laws themselves should not be considered alone and in the abstract. The actual application of these laws also needs to be considered.vv