Annexed to this working guide is a copy of a recent initiative launched in Indonesia to encourage private sector restructuring. In effect, this initiative proposes an informal (out of court) "work out" style of corporate restructuring in appropriate cases. We do not put this forward as a perfect model but it provides a good basis for examining the prospect of the possible application of a similar scheme or model in the countries which are the subject of this project.

Thus, in this section we ask that you read the annexure [particularly the part headed "1. Adoption of Principles", paragraphs "a" to "i"] and, having considered those principles, comment on their possible application and implementation in your economy. In particular we would like to know the following:

(a) by reference to each of the above paragraphs, comment on the suitability of their application in your economy;

 

(b) state the difficulties that might be encountered in their application in your economy;

 

(c) briefly state whether (and what) changes or additions might be required to the law in your economy for the application of the "work out" methodology and whether such changes or additions are a practical possibility.

Finally, in this section, we would like to know you opinion generally on this initiative, the areas that you regard as strengths; areas that are weak; and areas where you consider modification and improvement might be made.

The recent regional economic crisis has demonstrated the need for insolvency law reform throughout Asia. It is important that each economy in the region implement an effective informal workout procedure, but such a procedure must be but part of an overall package that includes an effective corporate restructuring legal regime. Inevitably, in many instances informal workout procedures will falter and creditors and companies alike ideally should be able to resort to an efficient, rule-based judicial procedure. Such a procedure should enable the parties to bring their disputes before a judicial or administrative body for adjudication. It is hard to see how certain intractable problems - such as corporate debtors perpetuating frauds against their creditors or creditors unfairly withholding consent from a fair corporate rescue proposal - can be resolved in difficult cases without the intervention of a judicial or administrative referee.

That being said, an effective workout scheme is a crucial component of a economy's overall insolvency practice. In cases where the parties are willing to cooperate, an important advantage of workouts is the speed with which results can be achieved.

There are many similarities between the Initiative and the Guidelines on Corporate Difficulties in Hong Kong, China (which are discussed in detail this Report), including the standstill, interim financing, the formation of a steering committee, the reliance upon experienced individuals, and the lack of any discrimination between local and foreign creditors. These similarities are among the Initiative's strengths. However there are other areas that would need to be revised as incentives for adoption in Hong Kong, China.

At the outset, the Preamble and the Government Policy would need to be amended. There are some notable omissions from the list of groups that are intended to benefit from the implementation of the Jakarta Initiative, notably company creditors, shareholders, and customers. Explicit mention should be made of these groups in addition to those already included in the Initiative (employees, the banking and finance sector, and the government.)

There are also a few theoretical problems with the Principles (#2, #3, and #4 are also applicable to the Hong Kong, China Guidelines):

(1) Not all creditors should be bound by the Initiative. Arguably, banks and other financial institutions should be bound, but it seems unfair to bind smaller creditors, especially in the light of the requirements for interim financing. There must be some incentive for such creditors to cooperate. In the absence of such incentives, such creditors should not be bound.

(2) Principle c(2) -- which provides that creditors 'should agree on a set of special rules detailing what creditors and debtors can and cannot do during the standstill period' -- will likely lead to unfortunate delays. Arguably, these special rules should be set out in the Initiative and not be agreed on a case-by-case basis.

(3) There needs to be a stick or cramdown procedure in g(3) to assist in forcing concessions where appropriate. It is not always possible to achieve unanimity. However, h(2) notes that the commercial court may be able to exercise such powers.

(4) The interests of secured and unsecured creditors should be differentiated.

(5) The need to disclose conflicts of interest.

The major problems for implementation in Hong Kong, China are as follows:

(1) All creditors, and not just financial institutions will be bound by the Initiative.

(2) The Preamble and Government Policy should state the importance of the interest of creditors.

(3) Given the nature and preponderance of the family-controlled company in Hong Kong, China, it is unlikely that many corporate debtors would agree to be as forthcoming with company information or as cooperative with the Committee's advisors as required by the Initiative. Hong Kong, China bankers would welcome such requirements, but in practice it is unlikely that such compliance could be achieved in a voluntary procedure.

(4) There is no requirement that conflicts of interest be disclosed.

(5) More detail is need on the likely costs of the Initiative.