5. LEVEL OF INSOLVENCY CASE ACTIVITY

This section focuses on the extent to which both formal and informal insolvency processes are being used. At the time of the first symposium, two of the economies (Thailand and Indonesia) had not long completed reforms to their respective laws and all of the economies (with the exception of Philippines) had only recently established informal insolvency processes. The main interest therefore is to see to what extent these processes have been used. This primarily involves presenting the statistical numbers and endeavouring to analyse their significance. In the next section of the report the value of the statistics themselves and other information is evaluated.
The statistics that follow are mainly for this calendar year to date. They are only concerned with corporate insolvency.

5.1 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. By comparison, in Malaysia and in Korea the figures for insolvent liquidations are expected to be around the same high figures for 1998.
5.2 Formal rescue
In the Philippines there have been 11 filings for reorganisation in the year to date. In Thailand 8 companies have filed for business reorganisation. In Korea the figure for cases of formal rehabilitation is expected to be around 160 (although to that should be added some 400 cases for composition). In Malaysia there were 20 filings for schemes of arrangement. In Indonesia there were only 6 cases for suspension of payments.
5.3 Informal rescue
In this area, particularly in those countries in which a form of 'structured' informal process is available, the level of activity appears relatively high. For example, in Thailand more than 700 corporations have sought the assistance of the CDRAC debt restructuring process. Approximately one-half have progressed to the point of putting a standard form of debtor/creditor agreement (see the later review of this in the section dealing with Informal Insolvency Processes) in place and some 52 of that number have reached agreed restructuring plans with their creditors.
In Indonesia 350 cases have come under the Jakarta Initiative debt restructuring program. These have included some 250 medium to large-scale companies. However, there is not much other public information available concerning these cases. The only information of how many have resulted in the adoption of rescue or reorganisation plans suggests that the percentage is quite small.
In Malaysia some 63 companies have been involved in the CDRC debt restructuring process. These have included quite high profile listed public companies. The more enforcement driven Danaharta process (which follows on from the acquisition of non-performing loans from banking and financial institutions) has seen a considerable number of companies (some 1780 cases) under review in the debt settlement/recovery process. Some of these have sought restructuring arrangements through the CDRC. There are others to which special managers have been appointed through the extra judicial powers exercised by Danaharta.
In Korea about 80 companies have entered the structured workout process known as the Corporate Restructuring Accord. A high percentage of these are known to have reached agreement on workout plans. A lot of attention has, however, been directed at restructuring the top 5 chaebol and the next largest group of chaebol (known as the '6-64'). This, plus the fact that many of the subsidiaries or affiliates of these big chaebol are dependant on their restructuring plans, has tended to distract needed informal workout attention to smaller, medium sized insolvent companies. This may, in part, explain the relatively small numbers.
In all five countries (including the Philippines which does not have a structured informal process) other informal processes operate which are distinctly 'private' versions of the work-out concept. It is difficult to quantify this level of activity, except by anecdotal evidence (that is not surprising - it is not known, for example, what numbers engage in the 'London approach' work-out process in England). However, all the country consultants consider that there has been relatively high activity at this level.
5.4 Conclusions and proposals
The level of insolvency cases has been relatively high. However, some of 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. For that matter, the numbers in Malaysia and Korea are not consistent with the problems in each of their economies. On any reckoning there must have been (and, presumably, still are) a huge number of hopelessly insolvent corporations unaccounted for.
Of course, that is a view from the conditioned perspective of more developed and fully industrial economies. The observation on the numbers of liquidation cases is not meant to be a criticism in itself. But it is baffling and difficult to explain. Is it likely, for example, that the extraordinarily low figures in, in particular, Thailand, Indonesia and the Philippines indicate either that liquidation is not a process which sits comfortably with cultural and commercial attitudes or that there are some real problems with the law itself or the application of that law?
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 relative recent introduction of these processes into societies in which they were previously not known. But it may also indicate that distinctly legal and court processes are not as suitable for the commercial culture of those countries as informal processes appear to be. The Indonesian consultant, for example, observes that 'both debtors and creditors still consider out of court settlement to be the best way to settle their debts'.
Judge Wisit Wisitsora-At, a justice of the Commercial Court in Thailand with special reponsibility for insolvency law reform, has commented on the low number of formal reorganisation cases in Thailand. He observed that one reason why a company may not seek a formal reorganisation was because under the terms of the law the directors of the company would almost certainly lose control of management. He also said that because it is a new process, the persons involved had no experience and there is still an insufficient understanding of the process.
The level of informal work-out activity under the structured and private processes has been considerable. It appears to be a more acceptable form of process, one that is essentially private and non-legal, and more suited to the commercial culture of the five economies. Also, in jurisdictions like Thailand and Indonesia, it might be that the reforms to their formal insolvency laws has raised the prospect of a corporation being forced into liquidation or a court controlled reorganisation processes. That has possibly given some impetus to debtor corporations to take advantage of the informal processes before creditors seek to have the formal processes applied. If that is the case then a necessary feature of a rounded insolvency law system may have been established in each of those 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 communities. That is encouraging, particularly in economies such as Thailand, Indonesia and Korea, where there had been practically no experience and very little knowledge of informal workout practices.
However, it is possibly 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 remains to be seen whether the structured informal process will continue to flourish once that repair has been completed. In the case of Malaysia, for example, the informal work out may be seen to operate as a semi-forced process because of the leverage that Danaharta is able to exert on debtor corporations that are subject to debt recovery through Danaharta. It is highly improbable that Danaharta will continue to operate once the banking sector has been repaired.
Another factor for consideration, amongst these statistics, is that at the first symposium it appeared that there was a strong cultural attitude of resistance toward any admission of insolvency or financial difficulty. This can also translate into negative attitudes toward both formal and informal insolvency and reorganisation processes, even though many of these might offer at least the prospect of the corporation being saved from liquidation and extinction. Further, there appeared to be a strong commercial aversion toward 'loss of control' or anything that might result in outsiders dictating the immediate and long-term future of a corporation in financial difficulty. This is consistent with the comments of Judge Wisit.
A final observation concerns some statistics from Indonesia. The country consultant mentions that '12 bankruptcy petitions' were 'withdrawn' or 'settled'. There could be cause for some concern in this because it may suggest that bankruptcy petitions are somehow being settled between the petitioning creditor/s and the debtor corporation (in other words that bankruptcy petitions are being used as some type of individual debt recovery process). That is not consistent with the view that has been traditionally taken of such proceedings, which is that a bankruptcy petition commences a communal process for the benefit of all creditors. It is not just a one-on-one process. There is a strong view in many developed countries that a bankruptcy petition, absent fundamental flaws in its form and substance, should only be permitted to be withdrawn by leave of the court after the court concludes that there are no other creditors. This may be something that should be carefully considered by the Ministry of Justice in Indonesia.
There are no particular proposals that may be made from a consideration of the statistics alone. Other aspects of the operation of the insolvency law system need to be considered first.