9. INFORMAL INSOLVENCY PROCESSES

This is quite clearly the area of the greatest development and success in corporate insolvency in all the economies. At the time of the first symposium a number of the RETA economies had only just promoted informal workout initiatives; the experience of them was yet to come. Now, with the passage of only a short space in time, it appears from the statistics and comments and observations that all the informal initiatives are working well.
As mentioned earlier, some of these were linked to managing the crisis ridden banking sector and may be viewed as part of that overall policy direction. However, with one or two exceptions, most of these are capable of being used or adapted to a stand alone approach directed at assisting corporations in financial difficulty.
These initiatives are important and deserve appropriate recognition, response and support. The informal workout technique is now being employed in many countries as an alternative to formal rescue processes under insolvency laws. In the context of the cultural, social and commercial environment of many of the economies in the region, the development of this technique may prove to be of greater utility, though not necessarily of greater importance, than the development of formal rescue processes.
In all the economies there has been significant use of informal rescue processes. The country reports give examples of their successful employment.

9.1 Malaysia
Malaysia has had the experience of two structured informal processes. One is the 'special manager' style of imposed work out process under the Danaharta legislation. The other is the voluntary work out under the CDRC.
Regarding the Danaharta regime, the Malaysian report gives an example of a company that had three attempts to resolve its problems under the formal scheme of arrangement process, all of which failed. Danaharta appointed special managers to the company and within 3 months a workout had been approved by secured creditors. If the workout is successful, all classes of creditors will be paid in full over a period of time.
The Danaharta regime is interesting for two reasons. First, the extraordinary range of its powers, under which it may:
- Endeavour to broker an informal work-out with other creditors;
- Participate in an informal work-out through the CDRC (in reality it can prove the catalyst in encouraging or persuading a debtor corporation to submit itself to this informal process);
- Participate in a formal scheme of arrangement;
- Appoint receivers and managers to a debtor corporation (assuming there is power to do so in the security documentation);
- Enforce security rights through power of sale unaffected by the usual restraints on sale that might affect other secured creditors (as mentioned earlier in this report);
- Appoint special managers to a debtor corporation and then assume an extra-judicial role of approving a proposed plan of reconstruction.
These powers give Danaharta a very considerable leverage to bring about a speedy and efficient determination of the affairs of a corporate debtor.
A major aspect of interest of the Danaharta regime is that under the informal rescue process Danaharta may employ through the appointment of special administrators, there is no involvement of a court in the process at all. It is an entirely administrative process. In that respect it invites comparison with the formal reorganisation process of the Philippines under the administrative control of the SEC.
In respect of the CDRC informal work-out process, the Malaysian consultant observes that although it is not very efficient or fast, it has been a major step in the right direction for Malaysia. The biggest problems seem to be that:
- CDRC does not cover small/medium sized corporate debtors;
- There is a problem with 'new money' requirements for urgent working capital needs;
- There is difficulty in ensuring that secured bank creditors, particularly foreign bank secured creditors, fully participate in the informal process. In this respect, if Danaharta is one of the creditors, its extra-leverage can help;
- There is a problem with the appointment of consultants to ensure that the financial and other affairs of the corporate debtor are fully analysed to provide the basis of a plan.
The views of some foreign bank officials in Malaysia indicate that their experience of CDRC is fairly favourable. They comment, however, that sometimes the rescue proposals that are made are not in the best interests of creditors as they might be or are too optimistic and non-commercial. There is not sufficient attention to detail, analysis, verification of future income, cash flow projections and the like. Local banks tend to favour acceptance without proper analysis.
One way to remedy this is to expand the committee of the CDRC to ensure that there are people with more experience. Other comments include that local banks are not yet experienced enough; they send junior staff to meetings and do not respond to proposals and other deadlines on time. This can be particularly frustrating for lead bank and steering committees.
The CDRC itself is proposing administrative and other changes to improve the process. These proposals include that CDRC will itself take over the negotiation of appointment of consultants if there is prolonged disagreement and that 3 more members (from the banking sector) will be added to the steering committee. It is the steering committee that analyses proposals before they are considered by creditors. At present too many of these proposals are slipping through that process without adequate analysis, causing inefficiency and delay.
It seems to be generally considered that the CDRC initiative has greatly assisted in developing the informal work-out process in Malaysia.
9.2 Korea
There has been a significant concentration on informal techniques for cases of corporations that are in financial difficulties. In particular, the structured informal process that was created under the auspices of the Korean Financial Supervisory Commission has been well utilised. This process, as explained in the first comparative report, involved more than 200 Korean banks and other financial institutions agreeing to an accord known as the 'insolvency deferral agreement' or 'work-out agreement'. If one of that number invoked the agreement in respect of one of its corporate debtors, all of the subscribing institutions would be bound by the terms of the agreement. Those terms provided for a standstill, negotiation of a plan of restructure, mediation of disputes and so forth.
The Korean report evidences a number of successful work-outs through the employment of this process in which a variety of restructuring and refinancing techniques have been employed. These have included reduction of share holding of owners; debt/equity swaps among bank creditors; sale of non-core assets.
However, despite the apparent success of the process, there are some concerns that it is not operating as efficiently as it might. Problems are seen in a number of areas, such as:
- The agreement only binds those financial institutions who have signed it. Thus, other creditors may still pursue their individual rights and frustrate or impede the process;
- There is a fundamental difference of approach between financially troubled companies and the financial institutions. The former are seeking the input of new capital, the latter emphasise short term retrieval of loans;
- Often there is a considerable dispute regarding the continued management of the corporation.
It is considered that training and education, especially at bank and corporation management level, in work out techniques, assessment of long term risk and negotiation would be of assistance.
9.3 Indonesia
The experience of the Jakarta Initiative is more difficult to discover. The Indonesian consultant suggests that progress under this initiative has been a lot slower than anticipated and only a few restructurings have been put in place. The process has been also hampered by a lack of co-ordination between the relevant authorities.
The report of the World Bank, Corporate Restructuring & Governance Group, of April 1999, stated that the progress in finalising cases of informal restructuring has been slow. Reasons attributed for this include that both creditors and debtors have been reluctant to recognise losses, the new bankruptcy law has been ineffectively applied, and financial and operational restructuring is sometimes complex.
Certainly, the Indonesian informal process initiative does not appear as successful as those of Thailand, Korea or Malaysia. There are a number of differences.
- First, the bank restructuring authority, IBRA, does not appear to exert the same leverage on corporate debtors as does its Malaysian counterpart, Danaharta. IBRA appears to have concentrated on the acquisition of non-performing loans and not on their recovery or management.
- Secondly, recourse by a creditor to the formal insolvency processes (in particular, liquidation) in respect of an intransigent corporate debtor does not pose as great a threat in Indonesia as in Malaysia. Thus there is less motivation for a corporate debtor to engage in a voluntary informal work-out. The 'shadow' of recourse to the insolvency law is not as sharp and pointed.
9.4 Thailand
The structured informal process has been significantly assisted by the production of standard form 'Inter-Creditor' and 'Debtor-Creditor' agreements. These were settled in March 1999 as part of the operation of the structured informal work-out process through the CDRAC. The agreements are quite elaborate.
The first provides the basic conditions under which the creditor parties to a work-out will conduct themselves in endeavouring to reach consensus on proposed plans for corporate restructuring. It deals with such things as voting on plans, time limits for decisions, mediation of inter-creditor disputes, and the appointment of an 'executive decision panel' to review and approve or reject a proposed plan. The decision of the executive panel is final and binding on the creditors who have executed the inter-creditor agreement.
The 'debtor-creditor' agreement is required to be made by a debtor corporation that seeks to invoke the CDRAC informal work-out process. The debtor must be first 'approved' by the CDRAC. In essence, this agreement is made with the banks and other financial institutions that have agreed to the inter-creditor agreement. The 'debtor-creditor' agreement binds the parties to the inter-creditor agreement. The 'debtor-creditor' agreement provides for such things as convening of meetings, lead creditor, steering committee, provision of information, promises by the debtor while the negotiation process is under way, mediation of disputes, debt trading, voting and approval of plan, implementation of plan. The agreement contains reasonably detailed schedules for the commencement and advancement of the workout process and of information that the debtor is required to provide.
This is an interesting and important advance for the informal process. It possibly enhances the efficiency of and avoids unnecessary delay in the process.
Another development in Thailand is that the CDRAC process has been used in some cases to develop 'pre-packaged' plans. This technique is necessary if all creditors are to be bound by a plan (the CDRAC process only binds creditors who agree to the plan - it does not bind those who dissent nor other creditors who have not been involved in the process). The plan is thus 'agreed' by a dominant number of creditors through the CDRAC process and the corporation then applies for reorganisation under the insolvency law. The pre-packaged plan becomes the reorganisation plan. Creditors are notified and required to vote. If approval from the requisite majority is obtained the plan binds all creditors.
It should also be mentioned, however, CDRAC normally only involves financial sector creditors and the process is really designed for reasonably complex restructurings. It is relevant that some 46% of corporate debtors under the guidance of CDRAC have not signed the debtor-creditor agreements and have sought to negotiate simpler debt restructuring arrangements.
Indeed, according to the country consultant for Thailand the clear majority of corporate debtors in Thailand have sought informal private work-outs.
9.5 Philippines
There is no structured form of informal rescue process. However, there has been an increasing tendency to utilise essentially private informal processes. The report for the Philippines contains details of some recent actual attempts at private workouts. One of the commercial techniques that is used in some of the private workouts is that which is known as 'dacion en pago'. This is, in effect, an outright transfer of assets of the debtor to the creditor(s). The creditors may then thereafter treat those assets as their own.
The biggest difficulty in the private style of workout, as might be expected, is obtaining agreement from all the creditors. Still, it is encouraging that a commercial practice is gradually emerging without the assistance of government intervention or encouragement.
9.6 Conclusions and proposals
- Further education and training among banks and financial institutions and owners and managers of corporations about the methodology and processes involved in informal insolvency workouts would be desirable (see earlier sections on corporate management and bank lending and monitoring practices).
- The procedures are also dependant on the availability of professional and other advisors with experience and knowledge of the processes of informal insolvency workouts. There should be education and training courses to encourage the development of these professionals (this would compliment the training and education of private professional insolvency case managers).
- The presence of a facilitating agency to bring debtors and creditors together has clearly been very useful and should be continued.
- Once the systemic debt problem of the banking sectors in many of the economies is arrested, the informal processes should be retained and certainly should not be dismembered. They might be reviewed to ensure that they are capable of dealing with corporate debt problems generally and, in particular, that they take proper account of the important collective characteristics of insolvency practices.