7.1 Korea
Some reforms to the various parts of the Korean insolvency legislation
that may be detailed as follows:
-The Composition Act was amended in February 1999 to widen the
grounds upon which a composition application might be refused
and affording creditors more rights to apply for cancellation
of an application for approval of a composition;
-The maximum debt deferral period under the Corporate Reorganisation
Act has been reduced from 14 years to 10 years.
In addition, the Korean government has proposed other reforms
which include that the speeding up the reorganisation procedure
by providing tighter time frames and deadlines for each stage
of the procedure. In particular, it is proposed that:
- the court be required to make a decision for a preservation
order within 14 days of a request;
- the court be required to determine whether to make a commencement
order within a shorter period of time; and
- a reorganisation plan must be submitted within 4 months of
the time fixed for submission of creditors claims.
The inordinate time taken to effect and execute a reorganisation
in Korea has long been a subject of criticism of the process.
These reforms will no doubt improve the procedure. However,
they will also have the effect of putting judges under greater
pressure. The Korean consultant observes that without a commensurate
increase in the number of judges or a reduction in their workload,
the judicial handling of formal insolvency cases may present
a problem in Korea.
Finally and most importantly, it should be recorded that a full
insolvency law reform process has been commenced under the Ministry
of Justice and the IBRD. This is, amongst other things, designed
to increase the fairness, efficiency and speed of the procedure.
7.2 Indonesia
The reforms to the bankruptcy law have brought many improvements.
Among the benefits are:
- two processes under the one law - one for bankruptcy (or liquidation)
and the other for suspension of payments;
- a much quicker judicial procedure (including appeals);
- simple evidence or proof requirements to establish that a
corporate debtor is insolvent;
- generally, a more open and transparent process.
Some problems have arisen as a result of procedural and interpretation
difficulties. For example, a decision of the Supreme Court determined
that the legal term 'debts' in the Bankruptcy Law should be
confined to loan type debts and not extend to other obligations
which are capable of being expressed as a money obligation -
for example, a debt arising from the supply of goods or the
performance of services. This seems to be a particularly narrow
interpretation by the Supreme Court.
A new formal reorganisation procedure (to be possibly known
as the 'Restructuring Law') is being developed through the Ministry
of Justice and private sector contributions. The thrust of this
proposed reform appears to be to provide separate legislation
for cases of corporate reorganisation and restructuring. It
is, as yet, unclear as to what effect this might have on the
existing 'suspension of payments' procedure under the existing
bankruptcy law and whether the new process will be incorporated
into the existing law. It would be of some concern if formal
insolvency processes were separated.
7.3 Philippines
In the Philippines the chief problem has been the absence of
definitive rules under the SEC reorganisation procedure. The
SEC is not time bound and, as a result, if it issues a stay
order, all creditors, but particularly secured creditors, are
precluded from exercising their rights for an indefinite and,
possibly, lengthy period of time.
Thus, the main criticism of the formal reorganisation process
is that it is debtor friendly and, in the absence of fair commercial
rules of procedure, the balance heavily favours debtors.
Now a set of rules to give much needed transparency and certainty
to the suspension of payments and rehabilitation procedures
of the SEC is proposed. There is, however, some debate about
the rules in a number of critical areas and, unfortunately,
the scope and text of the proposed rules has not been finally
determined. There is also a suggestion that the rules may be
unconstitutional, even though they may be necessary and desirable.
Some of that opinion maintain that the new rules should take
the form of duly enacted amendments to the existing Bankruptcy
Law.
In summary these rules may provide for much of the detail that,
somewhat astonishingly, had been lacking from the time the SEC
was given the jurisdiction in 1982. The more important features
of the proposed rules are:
- the SEC will be empowered to order the liquidation of an insolvent
corporation if it appears that there is no reasonable possibility
of rehabilitation;
- the 'market place' negotiation of a plan between creditors
and shareholders will be subject to the provision of minimum
requirements for a rehabilitation plan;
- more extensive financial and other information will be required
from a debtor corporation at an early stage of the procedure;
- greater creditor involvement with provision for a creditors
committee that would have considerable powers;
- more extensive powers to ensure that a corporation is properly
managed during the reorganisation process and powers for an
independent receiver to provide or assess accounting and other
information;
- power to set aside transactions as if the corporation was
subject to liquidation;
- some degree of protection for emergency financing.
Clear time limits for the performance of various steps and for
the length of time of stay or suspension orders are also intended
to be imposed.
These rules would create much needed credibility to the formal
insolvency processes of the Philippines. They should provide
greater creditor and commercial community confidence in those
processes. However, there is some concern that the rules do
not provide sufficient protection and involvement of creditors
in the process. For example, rules that reorganisation plans
should be the subject of an affirmative vote by creditors and
that the position of secured creditors should be protected during
the reorganisation process may not be included. That would be
a matter of some concern to the commercial community.
The rules should also provide a greater degree of respect for
the SEC itself.
In that respect it has always seemed somewhat unusual that a
regulatory administrative body should have been entrusted with
jurisdiction in an area that has traditionally been the sole
province of the courts. But the performance of the SEC, particularly
over the last two years, may suggest that adherence to this
'tradition' is not necessarily the only way. The executive of
the SEC is principally composed of business people. There must
be some good sense in enabling business problems and difficulties
to be addressed in such a commercial forum.
7.4 Thailand
In Thailand the main source of comment is that the new formal
reorganisation process has not attracted many cases. There have
been far more reorganisations through the informal CDRAC process.
Although that process does not have the benefit of the automatic
moratorium or stay under the formal process, it has the benefits
of speed, the coercive power of the Bank of Thailand (for difficult
banks) and a mechanism that encourages creditors to agree amongst
themselves.
The Thailand consultant suggests that other possible reasons
for the low formal reorganisation numbers are these:
- There appears to be some stigma attached to filing for reorganisation
under legislation that is named the 'Bankruptcy' Act because
it creates a perception that the company is 'bankrupt'.
- During the formal reorganisation process the directors lose
many of their powers and may lose them altogether.
- There may be a perception that no court proceedings will ever
be conducted expeditiously.
In addition there are two particular criticisms of the legislation.
The first is that if a plan is not sanctioned by the court the
process is terminated and there is no automatic conversion to
liquidation. The second is that the law requires that a debtor
corporation is insolvent on a balance sheet test. It is often
easy to show balance sheet 'solvency', particularly if values
of assets are inflated. Yet, such a corporation may (probably
will) be insolvent on a cash flow test. This may serve to protect
companies that are in severe financial difficulty.
A new law has established a Bankruptcy Court with exclusive
jurisdiction in bankruptcy and reorganisation processes. At
present only a central bankruptcy court has been established
but there are proposals to establish regional bankruptcy courts.
There have also been some amendments to the newly reformed Bankruptcy
Law. These cover a number of matters, including;
- speeding up the procedure by requiring cases to be heard and
determined without adjournment except where necessary;
- raising the minimum amount of unsecured debt to enable a creditor
to commence proceedings;
- classifying creditors into groups and requiring that reorganisation
plans must be approved by each group;
- removing the discretionary power for the court to approve
or reject a plan and establishing objective criteria (including,
for example, a requirement that creditors must receive not less
than would have been received if the company had been liquidated);
- enabling 'new money' to be supplied to an insolvent company
provided it is shown to be necessary to enable the business
of the company to continue; and
- introducing concepts of 'related parties' and 'insiders' and
thus widening the ambit of the avoidance of transaction provisions.
These changes represent important substantive changes and indicate
that progress and problems with the new legislation need careful
monitoring to enable it to function more efficiently.
7.5 Malaysia
Here the chief concern appears to be about the absence of a
better formal rescue process and the lengthy delay, uncertainty
and possibility of abuse in restructuring cases under the present
process. The concern is also expressed that there is insufficient
attention given to redressing corporate fraud and mismanagement.
It was hoped that Malaysia might have attempted a major overhaul
of its insolvency law system (similar to that which has occurred
in Singapore and is under consideration in Hong Kong,China).
Unfortunately, however, the movement for the introduction of
a modern, more efficient and effective formal rescue process
in Malaysia appears to have lapsed.
7.6 Super Priority and New Money
As noted in the ADB report, an essential need that has been
identified in the successful operation of the formal rescue
process is the provision of on going funding for a corporation
that genuinely seeks a possible rescue plan. Often, such a corporation
has a severe liquidity problem that affects its ability to continue
its business operations. It cannot pay for critical supplies
of goods or services (including the services of its employees).
Some developed insolvency law regimes have sought to accommodate
this problem in various ways. It is necessary for the law to
provide, firstly, the necessary legal sanction for obtaining
such funding and, secondly, a statutory 'super priority' for
the repayment of that funding.
None of the insolvency laws of the five economies provides for
this essential need.
7.7 Conclusions and proposals
- New legislation, such as that in Indonesia and Thailand,
needs to be kept constantly under review so that changes may
be quickly made to improve the efficiency and predictability
of the law. It is encouraging that so many of the economies
are actively engaged in a reform monitoring process. Some care
should possibly be exercised in Indonesia regarding the proposal
to create a separate reorganisation law, else it may result
in a non-integrated insolvency law system (see the first comparative
report for comment on the dangers of non-integration of insolvency
processes).
- Some greater examination and enquiry may be necessary in the
economies where the statistical numbers do not seem to reflect
what the commercial realities appear to dictate. Is there a
problem in those economies because the law is too over regulatory
and too formal for the commercial culture of the economies?
- Malaysia would clearly benefit from a new formal rescue procedure.
That would also present the opportunity of reviewing the position
of secured creditors in an insolvency environment and drawing
a better balance.
- The Philippines is clearly in need of rules to govern the
formal reorganisation process. The rules proposed are to be
encouraged but the opportunity should be taken to ensure that
there is sufficient protection for and involvement of creditors
in that process.
- The insolvency law regime should provide for the provision
of funding essential for the continued operation of a corporation
that is clearly eligible for a possible plan of rescue under
the formal rescue process. The law should be such that it:
Sanctions such funding;
Provides a clear and certain first priority for the repayment
of the funding; and
Provides for such things as subrogation of existing creditors
and, possibly, subrogation of existing securities over property
of the corporation in favour of the 'new money' supplier.
