Rules of the game

CHINA: PROCESS IN PLACE, BUT STIGMA REMAINS
A filing can be made for bankruptcy with a view to the reorganisation of the company. This will involve the appointment of an administrator with wide management powers and will include a moratorium on enforcement which extends to secured assets. Alternatively, a filing can be made with a view to seeking approval by the creditors of a conciliation agreement . This requires the support of two thirds in value of the unsecured creditors.

Article 6 of the Enterprise Bankruptcy Law contains anti-avoidance measures which operate retrospectively from the bankruptcy for 12 months and which enable the insolvency office holder to request the court to rescind the following bankruptcy transactions:

(1) transferring property without consideration

(2) Dealing at an obviously unreasonable price

(3) providing collateral for any unsecured debt

(4) prepaying any debt before it becomes due

(5) giving up claims.

Article 35 provides that where the investor of the debtor has not fully performed its capital contribution obligation, the administrator shall request such investor to make full payment of its committed capital contribution regardless of the contractual capital contribution schedule.

There remains a considerable degree of wariness in China towards the concept of bankruptcy as it carries a heavy stigma and is viewed as a Western import. The judges and professionals will need to be trained and become familiar with the new law if it is to be effective, as inevitably, at least initially, there are likely to be inconsistencies and uncertainties as to how it is applied in practice.

&#42NB Responses based on the new 2006 Enterprise Bankruptcy Law 2006, effective 1 June 2007.

JAPAN: TWO RESCUE ROUTES
There are two formal insolvency rescue procedures in the country. Until recently a corporate arrangement procedure had also been available, but this was little used and has recently been abolished.

Corporate Reorganisation is only available to large business corporations (kabushiki kaisha). These are joint stock companies commonly used by foreign investors. This procedure culminates in a court-sanctioned reorganisation plan involving all relevant parties. The requirements for filing a petition with the court include: (i) significant likelihood that a bankruptcy event will occur or (ii) present inability to pay debts which are due without substantially impeding an ability to carry on business. There's an automatic stay postcommencement in respect of all claims from all creditors (including secured creditors). The court will appoint the directors as the administrator unless the directors are likely to face legal action from creditors in respect of their management of the company. The administrator is able to transfer business/ assets free from encumbrances (even before approval of the reorganisation plan, if the court permits). The reorganisation plan requires approval according to quite detailed voting rules which include the votes of a simple majority of the total value of unsecured creditors and, where their rights are impaired beyond a mere change of maturity date, 3/4 in value of secured creditors' claims.

The Civil Rehabilitation Procedure is available to all entities (including joint stock companies, other companies and individuals.) This procedure seeks to achieve a court-sanctioned rehabilitation plan which creditors who are owed a substantial portion of the overall debt have approved. The criteria for filing a petition with the court include establishing that it is significantly likely that a bankruptcy event will occur. A stay preventing enforcement of secured claims may be obtained from the court if necessary. The court usually appoints a supervisor to approve certain activities. In exceptional circumstances an administrator will replace the directors. Court approval is required to transfer the whole or a material part of the business. The rehabilitation plan must be approved by one half or more in value plus a majority in number of creditors present and voting.

SOUTH KOREA: STRICT, BUT SIMPLIFIED WORKOUTS
There is a court supervised reorganisation procedure&#42 which includes a stay on enforcement action by all creditors.A trustee is appointed by the court but this is usually a representative of the debtor. The creditors' committee is mandatory and has extensive powers (including the ability to request an investigation into the management of the company and to request a variety of information). There is provision to allow a pre-pack where this is necessary to rescue the company and the court consents.

[The provisions of the Corporate Restructuring Promotion Act (effective 2001- 2005) contained basic rules and procedures to govern out of court informal rescues. There has, however been some debate as to its constitutionality and it is not yet clear the extent to which it will be extended.]

&#42 Based on The Debtor Rehabilitation and Bankruptcy Act (the ?Act?) which came into effect in April 2006. The Act consolidates the previous four insolvency regimes governed by: the Corporate Reorganisation Act; the Composition Act; the Bankruptcy Act and the Individual Debtor Rehabilitation Act. the rehabilitation procedures are modeled on US chapter 11.

TAIWAN: AVOIDING INSOLVENCY AT ALL COSTS
The available formal insolvency law rescue procedure consists of composition proceedings under the Bankruptcy Law 1980. Alternatively, creditors of a company in financial distress with publicly issued shares or bonds equivalent to 10 % of the capital of the company can petition the court for corporate reorganisation under the Company Law 1983. However, businesses in Taiwan tend to go to great lengths to avoid bankruptcy to protect their reputation. It should also be noted foreign insolvency procedures are not recognised in Taiwan.

HONG KONG: A FEW INFORMAL WAYS
There's no formal insolvency rescue procedure and the recent practice of using provisional liquidation as a quasi administration/rescue device has been disapproved by the Hong Kong appeal courts. However there are schemes of arrangement under the Companies Ordinance (Cap 32) laws. A resolution approving the scheme must be passed by 75 percent in value and 50 percent in number of creditors in each class present and voting at the relevant meeting, and also court sanction. Informal workouts are commonly used and the Hong Kong Monetary Authority and the Hong Kong Association of banks have jointly published non-binding recommended guidelines for the Hong Kong approach to corporate difficulties.

INDONESIA: HANDS OFF THE STRUCTURE
Only one formal rescue procedure is available namely the Voluntary Reorganisation. This is a composition plan under Chapter II of Law Number 1 of 1995 ( as amended by the New Bankruptcy Law 37/2004) which consists of full or partial settlement of the company's obligations. This must be approved by the court following approval from both secured and unsecured creditors.

The approvals required comprise more than one half of the unsecured creditors who hold at least two thirds of the unsecured debt represented at the meeting and more than one half of secured creditors attending who hold at least two thirds of the secured debt represented at the meeting. A composition plan approved in such a way is binding on all creditors except secured creditors who specifically vote against it. Pending approval there is a suspension of payments and if the plan is approved this may continue for a maximum of 270 days. A supervisory judge and an administrator will be appointed to manage the company's assets although they will not replace the directors and business will carry on as usual.

It should be noted that this procedure remains problematic because it only provides for debt reductions or rescheduling rather than reorganising the debtor's capital structure (e.g. under debt for equity swaps etc).

MALAYSIA: ADMINISTRATOR INTERVENTION
There are two rescue procedures to be employed in lieu of a formal insolvency rescue procedure.

The scheme of arrangement option is a debtor-initiated restructuring process requiring the approval of creditors and the sanction of the court. This must be approved by seventy five per cent in value and a simple majority in number of each class of creditor. Creditor classifications are established by the debtor and are usually based on a commonality of interests. The debtor can apply for a stay of all proceedings against it while it develops a scheme. Management remains in office. In practice, secured creditors in some cases prefer to appoint a receiver as a route to recover their indebtedness as this tends to be a quicker procedure which they can control.

Special administration was introduced under the Pengurusan Danaharta Nasional Berhad Act 1998, whereby Danaharta (the national asset management company) could appoint a Special Administrator over a company if it served the public interest, or to try to achieve either its survival as a going concern or a more advantageous realisation of assets than would be achieved in a liquidation. Danaharta ceased to operate in December 2005 and its residual assets are now managed by a governmentowned special purpose vehicle company. Despite the demise of Danaharta, the special administration procedure is still available (the use of the term ?Danaharta? has become synonymous with this procedure) and the objective is to prepare a workout proposal. The special administrator takes over the control and management of debtor and there is an automatic twelve month moratorium.

SINGAPORE: THE UK INFLUENCE
Two formal rescue procedures are available under the Singapore Corporate law (Cap50) 1967, both of which are generally effectively applied. The first procedure is known as Judicial Management, based on the UK administration procedure and lasts 180 days from the date of the judicial management order but may be extended. Its objectives include: (1) the survival of part or the whole undertaking as a going concern, (2) the obtaining of a court-sanctioned scheme of arrangement or (3) the achievement of a more advantageous realisation than in liquidation. Also available under S210 Companies Act (Cap 50) is the scheme of arrangement procedure which can be a useful device through which to rescue a viable business where 75% in value and a majority in number of each class of creditors voting on the plan give their approval. In common with other common law based schemes of arrangement there is no provision for the courts to ?cram-down? a dissenting class of creditors.

New legislation was introduced in January 2005 regarding the formation of Limited Liability Partnerships (LLPs) contains provisions relating to receivership and liquidation of LLPs. Also, new legislation modeled on the UK Insolvency Act 1986 may be considered in the near future (including a regime for Company Voluntary Arrangements ? a formal insolvency rescue procedure).

PHILLIPINES: PREFERRING THE INFORMAL WORKOUT
Formal insolvency rescue procedures include rehabilitation under the Supreme Court's Rehabilitation Rules 2001. A rescue is implemented with a rehabilitation plan which is required to be approved by the court. The debtor continues in possession of the business subject to the supervision of a court appointed receiver and the court. The court can order a moratorium on all enforcement action. However, largely because of the expense and delay generally involved in pursuing a formal restructuring process, enterprises often pursue informal workouts in preference to formal procedures.

Reforms have been proposed which consolidates the procedures and rules applicable to corporate rehabilitation and insolvency and suspension of payments proceedings. It is also proposed to introduce provisions similar to the S304 ancillary proceedings US which was applicable prior to the introduction of US chapter 15.

INDIA: THE PLACEBO EFFECT
Despite the existence of formal insolvency rescue procedures, the process is frequently unsuccessful. ?Sick? companies are restructured under the Sick Industrial Companies (Special Provisions) Act 1985 (?SICA?) whereby an operating agency, usually the lead lender, can be appointed to prepare a restructuring plan. If sanctioned by the Board for Industrial and Financial Reconstruction, the plan is binding on the members and creditors of the company.An automatic stay is in place preventing the enforcement of security and continuing legal proceedings whilst the plan is formulated. The SICA has not generally been an effective restructuring tool as it is a slow procedure and creditors are unwilling to compromise. some use is made of the scheme of arrangement procedure under the Companies Act 1956.

Informal workouts are relatively rare in India except for larger companies where multi-bank financing may be restructured under contractual arrangements for corporate debt restructuring (?CDR?). In the CDR Scheme, the signatories to CDRs agree that if the majority of 60 percent in number of lenders and 75 percent by value agree to a restructuring package, the dissenting banks will be bound. The CDR guidelines also permit non-CDR signatories to participate on a case-specific basis.

AUSTRALIA: FORMAL WORKOUTS PROVE EXPENSIVE, INFLEXIBLE
The most common formal corporate rescue process is Voluntary Administration which includes a moratorium on enforcement of debts. The creditors may agree a Deed of Company Arrangement (?DOCA?) (a majority in number and value of claims is required to pass a resolution) and it terms will apply in place of the administration. Secured creditors can vote without surrendering their security and creditors vote as a single class. Secured creditors are only bound with their consent. No court sanction is required.

Companies can also enter into schemes of arrangement under the Corporations Act 2001. To be binding this requires the vote of a majority in number of creditors voting on the resolution who hold 75 percent in value in each class of creditors. However, corporate rescues are often implemented informally as they may be cheaper, more flexible and carry less stigma.

NEW ZEALAND: AUSTRALIAN STYLE REFORMS ON THE WAY
The New Zealand insolvency legislation is based on regulations made under their corporate law. Companies may also compromise with creditors under Part XIV Companies Act 1993. The qualified majorities required to bind all creditors (including secured creditors, subject to a successful challenge on the basis that that the proposal unfairly prejudices their interests) is a majority in number and 75 percent in value. The debtor remains in possession, subject to the terms of the compromise. Informal workouts may be agreed by the parties and is frequently used in the case of complex restructurings.

Legislation incorporating the UNCITRAL Model Law on Cross Border Insolvency was passed in New Zealand in 2006 and this will come into effect after Australia also adopts the UNCITRAL Model Law.

The Insolvency Law Reform Bill had its second reading on September 5 2006. It includes provisions to: streamline the transaction avoidance rules, changes/reductions in the claims enjoying preferential status, and the introduction of a new voluntary administration system modeled on the Australian system to include the ability to incorporate a rescue plan, known as a Deed of Company Arrangement. Whilst modeled on the Australian system, some variations are proposed, including voting majorities (which for Australia are a majority in number and value, but which for New Zealand will be a majority in number an 75 percent in value of the debt.)

This article provides information of a general nature only and should not be taken or used as legal advice in specific situations which require careful consideration of all relevant facts and circumstances.