SECTION 9 - THE APPLICATION OF INSOLVENCY LAW IN THE RETA ECONOMIES

9.1 Introduction

The review of the insolvency law regimes of the RETA economies in the preceding section suggests, with a few notable exceptions, that many of the basic aims and policies of an insolvency law which is suited to the involvement of private corporations in a market economy are contained in those regimes.

What, however, of their application?

There are a number of methods by which this might be tested. One method is to review the statistics of the number and types of cases. Another is to review reports of difficulties in the application of the law in relevant case law. Yet another method is to take the comments and perceptions of persons and institutions who have been involved in insolvency cases and issues.

9.2 Statistics

It is important that there is readily available pertinent 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 regulation of forms of corporations and so forth.

Unfortunately, statistics on insolvency cases in many of the RETA economies are either barely sufficient or, worse, non existent. This, of course, refers only to bare numbers of cases. In the RETA economies where statistics do exist, the statistics rarely present any analysis of the type of information that a basic statistical recording system should show. Hong Kong, China at least, appears to be a notable exception. Reference to the statistical information contained in the Hong Kong, China local study, gives not only the number of cases of insolvent corporations but also gives details of the industries or business activities in which those corporations were engaged.

Before, therefore, proceeding to analyse the statistical information that is available, it is desirable to frame a proposal as follows:

The local studies provide the following statistical information:

(a)Philippines: There have been no liquidation cases for a number of years. It is suggested that this is because the availability of suspension of payments through the SEC has become the preferred form of process. However, over a period of sixteen years, the number of cases filed with the SEC for suspension of payments was only eighty-nine. Almost two thirds of these cases were filed during the last two years.

(b) Korea: The incidence of liquidation cases is "low" and the incidence of reorganisation cases is "high".

(c) Taipei,China: In the three years between 1995 and 1997 there were two cases of composition, eight cases of reorganisation and forty-seven cases of liquidation. Perhaps, more relevantly, 111 cases were "withdrawn" and 373 were "overruled".

(d) Indonesia: Prior to the 1998 amendments to the insolvency law there were practically no cases of liquidation or suspension of payments in Indonesia. The most recent statistic suggests that some 17 cases have been filed since the revised law took effect.

(e) Hong Kong, China: In 1997/1998 there were 459 cases of compulsory liquidation. For the period 1998/1999 there have been 491 cases of compulsory winding up. In the same period there has been a minimal number of cases of formal rescue.

(f) Thailand: The number of liquidation cases is "low" and the number of reorganisation cases is "very low".

(g) Japan: The number of liquidations and reorganisations over the last two years has been high by comparison with previous years.

(h) Pakistan: The only available statistic shows that there are presently 110 cases of liquidation pending and no cases of rescue.

(i) Malaysia: The number of liquidations is "high" and the number of rescues is "high".

(j) Singapore: Cases of liquidation and rescue are "medium" in number.

(k) India: There are no reported cases of rescue. In Delhi, over the last 3 years, there have been 125 orders for corporate liquidation but only 45 have actually gone into that process.

One of the most compelling observations that can be made from that survey is that in some of the RETA economies there are no or only a few cases of insolvency. This suggests, taking into account both normal and exceptional economic circumstances, that there is very little recourse to formal insolvency procedures in those economies.

9.4 Reported difficulties

There is very little relevant information from reports of actual insolvency cases. In Indonesia, however, there appears to have been some widespread reporting of particular cases under the newly revised insolvency and the newly established commercial court. A particular example concerns the Metrac case in Indonesia in which a group of financier creditors commenced liquidation proceedings against some related corporate debtors. The case appears to have been dismissed as a result of procedural technicalities despite that the debtor corporations were clearly insolvent and refused to seek relief under the insolvency law. The procedural issues may have been crucial because of civil law practices but there has been considerable criticism and concern expressed about the decision in this case.

9.5 Comments and perceptions

The local studies contain some valuable observations regarding the application of the insolvency law regimes. A selection of the more relevant and important of these is as follows:

(a)Indonesia: "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".

(b) Philippines: The liquidation process is ".... Very expensive, very difficult, very inefficient and very slow because: (1) the court process takes up a lot of time, (2) claimants are likely to delay the process through judicial means and (3) difficulties are encountered in disposing of unwanted and non marketable assets". The rescue process is: "¡­. inefficient because there are no laws in the Philippines providing for restructuring, consents are difficult to obtain".

(c) Thailand: "The court system in relation to the handling of formal insolvency proceedings is quite effective except for procedural delays involved with the hearing of cases".

(d) Malaysia: "The courts are only moderately effective in the handling of formal insolvency proceedings as procedures can be cumbersome and there is some element of delay owing to heavy judicial lists and schedules. Moreover, some judges may not have special experience or qualifications that enable them to deal with the underlying philosophical and conceptual issues".

(d) India: "The company court does not readily wind up companies unless there is a persistent default of several creditors or the magnitude of unsecured debt is adequate and of sufficient extent".

In summary and based on the above material it seems that in at least some RETA economies there is an aversion to formal insolvency procedures, particularly those which involve judicial process. In some RETA economies there is also 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.

In RETA economies where there is an "attitude" problem it is difficult to suggest what might be done to overcome this. It may be that attitudes might change in the long term as the process of commercial globalisation continues. It might also be assisted by education.

In RETA economies where there is a clear problem with the court and judicial system, that problem can only be overcome by intensive reform of those institutions which requires considerable resources and expenditure.

9.6 Issues for discussion 1 What are the main: (a) strengths; and (b) weakness of each insolvency law regime in the RETA economies? 2 What are the main barriers to access in each regime? How can these be lessened? 3 What is the evaluation of judicial/tribunal case processing and management in each regime? How can this be improved? 4 What is the evaluation of the general administration (e.g. through government department or private specialist administrators) of insolvency cases in each regime? How can this be improved? 5 What are the reasons for so few cases of formal insolvency administrations in some of these regimes? 6 What is required to improve the statistical information regarding cases of insolvency in some of the RETA economies?