Overseas Jurisdictions
Australia
In 1992 as a result of the Harmer report, Australia introduced the Voluntary Administration procedure in its Corporate Law Reform Act 1992, enacting the relevant provisions in Part 5.3A Corporations Law, which is Federal law.
Until 1992 there had been a rescue procedure known as Official Management, which required a high threshold of proof that the company could be rescued (something similar still exists, though is little used, in South Africa).
Clearly it will be necessary to examine how Voluntary Administration has served its purpose of enabling survival of some viable businesses without undue expense or court involvement. If otherwise desirable, there would be incidental advantages in terms of cross-border trade relations, and mutuality in any cross-border insolvency legislation, if New Zealand were to adopt a system similar to Voluntary Administration.
Administration is "Voluntary" in Australia since it is the company or its directors that usually initiates the procedure, and it does not require any initial court hearing. (Secured creditors with charges over all or substantially all of the assets may initiate appointment of an administrator) An automatic 28-day moratorium is imposed and the company is placed in the hands of a qualified administrator (who must be a registered State-licensed liquidator.) The usual purpose of administration is to attempt to effect a Deed of Company Arrangement, also provided for in Part 5.3A. If this were not possible, the company would go into liquidation. In addition, a liquidator may appoint an administrator, and the liquidation does not necessarily cease.
In terms of use, voluntary administration has rapidly become the most frequently used insolvency procedure, outstripping liquidation. However, the legislation permits an administration to proceed if it would result in a better distribution of assets than a liquidation, so it is not conceived wholly as a device for rescuing businesses. 52% of creditors voluntary liquidations are initiated immediately after a voluntary administration. 25The proportion of businesses actually rescued to those which go into some form of liquidation eventually, is about 20%. 26 However, Routledge examined 45 companies in administration through questionnaires and found that average returns were 37 cents in the dollar compared with an estimated 7 cents in liquidation.27 However, this was qualified by the statements that in some cases, the return stipulated in the Deed of Company Arrangement did not eventuate, and that the returns did not factor in the time value of money. Lastly, the questionnaire requested practitioners to select "successful" administrations.
Although there is no initial application to court, thus making it cheaper and more attractive to directors, there have been areas of uncertainty in the legislation which have led to judicial activity, revealing that the courts have wide discretion in some areas where the legislature has not provided definitions. Thus the overall cost of voluntary administration should be examined including court and professional costs.
Secured creditors with charges extending to all or substantially all of the company's assets are given a ten-day decision period during which they can appoint a receiver, but if they do not do so, the administrator retains control and management functions. (However, there is some anecdotal evidence to suggest that banks are making it a condition of consenting to the administration, that they can continue to have the right to exercise remedies at any time during the administration.)
Once administration commences, there is a 28 -day moratorium, extendable on application to the court.
There is also some suggestion that voluntary administration is open to abuse and has been abused. While abuse involving administrators seems unlikely to go undetected or unremedied, two criticisms are made of the procedure . First, directors favour voluntary administration since once they appoint an administrator, they can escape some scrutiny of their conduct. Indeed, it is a statutory ameliorating factor in reckless trading legislation in Australia that the director filed for administration (see also section 288FGA referred to below). The answer to this criticism might be to ensure that administrators have sufficient powers and duties to investigate and report wrongful conduct- even in Australia where the profession is formally regulated, administrators have been reluctant to "bite the hand" that appointed them, namely the directors. The Australians are currently in the process of tightening up reporting requirements in voluntary administration and professional bodies have recently issued codes of conduct.
The second criticism is that though directors initiate the procedure, it then allows creditors to decide the fate of the company, usually by a deed of company arrangement. Creditors have no concern with what happens to the company after such an arrangement unless they are to receive further payments, and so creditors can sanction a return of the company to its directors without any assurance that it is now solvent. However, such criticism of creditor control would seem to advocate a wider role for state or practitioner control in the public interest which would have to be justified by statistics as to the level of harm against the cost of more intense regulation, and in any event there can be few cases where there is much left to return to the directors.
Prima facie the suggestions of abuse do not seem borne out by statistical evidence and when seen in light of the wide use of voluntary administration, and the fact that it is in the hands of professional administrators regulated by their professional bodies and licensed by the State, there seems little cause for concern about the Australian procedure. However, the role of secured creditors, both at the time of and after initiation, needs to be addressed in establishing such a procedure (as also does the width of definition of secured creditors).
United Kingdom
In 1985 the UK made provision for two forms of rescue procedure, which are interrelated. Following the Cork Report in 1982, an administration order was conceived as filling the gap where there was no secured creditor with power to appoint a receiver over all or most of the company's undertaking. As stated above, receivers were seen to be doing a good job in ensuring survival or sale of viable businesses as going concerns, though the duties of such receivers were slightly increased in 1985 to make them appear more accountable to general creditors. The administration order is a court order which can be made on various grounds, by petition of the directors, the company or creditors (in most cases). In addition to satisfying the court that the company is, or is nearly, insolvent, it has to be shown that one or more of four purposes would be served by the order. One purpose relates to the other new procedure introduced in 1985, the Company Voluntary Arrangement. This was conceived as a simple form of compromise procedure whereby a debtor company could put a proposal to creditors, supervised by an independent practitioner who would report to court on the viability of the proposal. It is very similar to Part XIV Companies Act 1993 (NZ) though without the need for class meetings. However, unlike the procedure introduced at the same time for individuals in the UK, the CVA did not have a moratorium against creditor action attached to it. The administration order does effect a moratorium of a wide-ranging nature, and for that reason, CVAs have largely only been used under the umbrella of an administration order. The other purposes of an administration order are the survival of the company as a going concern, an "old-style" court sanctioned composition or arrangement, and lastly if it can be shown that there is likely to be a better realisation of assets than if a liquidation occurred.
The court has a discretion whether or not to make an administration order, and will expect a report by an independent insolvency practitioner (usually the proposed administrator) to be filed.
A person entitled to appoint a receiver who would have control over all or most of the company's assets can effectively "veto" the administrator's appointment by appointing a receiver in a five-day decision period, similar to the ten day period in Australia. This reflects the Cork Committee's view that as long as someone independent from the company was in control and management, it did not matter whether it was an administrator (acting on behalf of all creditors) or a receiver (acting primarily for one creditor). However, if a receiver is not appointed in that period, a secured creditor would have to seek leave in order to enforce security.
The moratorium imposed from the time of an administration petition is quite wide compared to that on liquidation, extending to all proceedings, enforcement of security and other legal process. It is not as wide as the moratorium in the United States, or under statutory management in New Zealand.
Despite the reasonably sophisticated system which has been established in the United Kingdom, the procedure has been relatively little used when compared to other jurisdictions. Administration orders have rarely risen annually above 250. It has been used in some high-profile cases, such as Maxwell and Polly Peck, and has been successful in these cases. The UK Government has bowed to pressure over the last five years to introduce a simpler, cheaper system alongside administration orders. The disadvantages of administration orders are that there is a relatively high level of court involvement, as well as professional involvement in preparing reports for the court. There may be further court applications during the administration. In order to effect a Company Voluntary Arrangement with the protection of a moratorium from creditor action, directors need to petition for administration, unlike the position in the US, Canada and Australia.
As a consequence, the government, after two consultation papers from the Department of Trade and Industry in 1993 and 1995, has introduced into Parliament a Bill for a simpler, cheaper company voluntary arrangement whereby directors may file for a 28-day moratorium during which they can put together a proposal, with the assistance of an independent professional. However, this is only applicable to small to medium sized enterprises,28 on the basis that it is smaller companies who can ill afford the court-driven administration procedure.
One aspect of the UK procedure which has proved beneficial is the body of judicial precedent that has built up, with court understanding of the "spirit" of the legislation. Indeed, in the area of protection of secured creditors as against protection of the debtor company, English Court of Appeal cases have been referred to in Australia where there was little statutory or judicial guidance prior to 1996.
In conclusion, despite the enthusiasm of the English courts to support the so-called "rescue culture" heralded by the 1986 reforms, the actual usage of these procedures has been generally restricted to larger companies and groups, or more unusual types of business such as football clubs and media companies.
The main reason for lack of usage is the cost of court and professional involvement. The Government has itself acknowledged this, and is introducing a parallel procedure which will reduce costs and be more attractive for small and medium sized companies. This reflects the procedures in Australia and Canada which were introduced after the UK procedure. Meanwhile, the recent report of the DTI on Business Rescue contains some important suggestions as to how the administration order and CVA procedures can be made more attractive, and how practitioners and government agencies can do more to improve the rescue culture.
(It should be noted that Singapore has a replica of the UK administration procedure in its judicial management procedure, which was used in the Barings case. Ireland has a similar procedure, introduced hurriedly in 1990, but the threshold for application to court is higher than in the UK, it being necessary to show a real prospect of business survival, rather than the alternative of better result than on liquidation).
United States
The United States formal rescue procedure contained in Chapter 11 of the Federal US Bankruptcy Code is now notorious. It is the oldest of the formal rescue regimes mentioned in this document, being enacted in 1978. It has now become the major formal insolvency procedure in preference to Chapter 7 liquidation (there are various specific procedures under other Chapters for agricultural industry and municipalities for example. In addition, the mainstream Chapters do not cover banks and insurance companies). It should be noted that much of US Bankruptcy legislation is harmonised as between procedures for companies and individuals. Thus, the word "bankruptcy" and Chapters 7 and 11 themselves, apply to both (with necessary modifications). In addition, it should also be noted that Chapter 11 filings at court, to trigger an extremely wide automatic stay under section 362 of the Code may be voluntary debtor's petitions or involuntary, i.e. filings by creditors. In addition, the conversion process between reorganisation and liquidation proceedings is relatively straightforward, unlike in jurisdictions such as the United Kingdom. In practice, most Chapter 11 filings are voluntary.
As is notorious, the distinguishing feature of Chapter 11 over many English-speaking jurisdictions' procedures other than Canada is that there is no automatic appointment of a professional "outsider" to any management role. The concept of the "debtor in possession" has become a technical one but broadly means that the company retains control and management functions, subject to a raft of duties and powers which distinguish it from the corporate entity pre-filing, and to the roles of creditor and the court. The powers include the ability to challenge preferences and unperfected security interests. The duties are fiduciary in nature. The court must sanction any disposals outside the ordinary course of business. In addition, there is provision for the appointment of a trustee and/or an Examiner by the court, but this is rare, such as in cases of fraud. The Examiner would usually be appointed at the request of creditor to conduct an investigation as to the viability of reorganisation, or where the assets are over $5 million, but the functions of the Examiner are largely at the discretion of the court.
There is no requirement that an entity be insolvent for Chapter 11 to be initiated, so that the automatic moratorium triggered purely by filing can be used tactically, as witnessed in litigation concerning Texaco and Dow Corning (silicone breast implants). (This has been criticised as an "abuse" of Chapter 11, which it may be. However, it has to be borne in mind that in some cases filing for reorganisation may be a genuine attempt to deal with anticipated insolvency that might follow from a major class action going against a debtor.) In addition, the cultural and philosophical commitment to the concept of "fresh start" which seems to extend to corporate as well as individual debtors, and to pre-date the 1978 reforms, means that once a debtor files, the wide moratorium protects the debtor from almost any creditor action for a relatively lengthy "exclusivity period" of 120 days during which the debtor is supposed to put together a reorganisation plan. It is this combination of the moratorium, the exclusivity period and the debtor in possession that has led to notorious charges of abuse. In addition, the court often extends the exclusivity period.
The debtor must put any reorganisation proposal to class meetings of creditors, so that all classes of creditors whose rights have been impaired by the proposal get a chance to vote. The debtor generally has at least 60 days after the 120 day period in which to negotiate. Dissenting classes can be "crammed down", in other words bound by the scheme despite voting against it. This happens rarely in practice. The circumstances in which that may happen are complex, as are the voting rules generally, but broadly the legislation envisages a scheme whereby the hierarchy of pre-filing security and other priority interests will be reflected in the proposal. In addition, the plan has to be confirmed by the court, which applies a number of fairness criteria and has to be satisfied that the scheme is "feasible", and that individuals who dissent will receive at least as much as they would on a liquidation.
Useful provisions assisting in formulation of a plan are that post-petition funding will attach super-priority, sometimes over secured creditors if necessary to the success of the scheme; in addition the debtor in possession has the ability to reject or confirm contracts and thus either leave a counterparty to an unsecured claim, or bind in a party or assign a contract against the counterparty's wishes.
The allegations that Chapter 11 is open to abuse need to be seen in the light of the checks and balances in the Code. First, filings should be made in good faith and for the purposes of reorganisation, and creditors may apply to court to challenge filings on this basis. This presents an opportunity for creditors and the court to filter out bad faith filings. In addition, there are various fee penalties at the discretion of the court to prevent attorneys from filing unviable or bad faith plans on behalf of debtors. Secondly, although a wide moratorium is in place, creditors can apply for the stay to be lifted. The court has developed a considerable body of jurisprudence as to the circumstances when this can happen, but two points can be made here. First, there is a test of "adequate protection" which is similar to principles developed in UK and referred to in the Australian regime. Secured creditors cannot usually have the stay lifted in order that they can enforce remedies if the debtor has ensured that their security or some substitute equivalent is protected. Secondly, since applications to lift the stay often present as the first opportunity to litigate on the merits of the filing, such applications have become a crucial forum for attacking the viability of any reorganisation prospect. A frequent outcome of such applications is therefore dismissal of the Chapter 11 procedure or its conversion to liquidation.
A frequent criticism of Chapter 11 is that it allows existing management, who may have been responsible for the company's parlous state, to stay in office. This is a misunderstanding of the concept of "debtor in possession", which refers to the corporate entity, not the individual directors or managers. Research shows that in fact old management is usually replaced early in the proceedings, as a condition of creditor approval for most plans.29
Another different feature of Chapter 11 compared with other rescue procedures is the role of the creditors, and in particular the creditors' committee. Such a committee is invariably appointed in Chapter 11, and has wider powers than in other jurisdictions where the role is largely consultative. In larger cases, however, the cost of the committee and its advisers may be paid out of the estate and thus add to the costs of rescue. There may be more than one creditors' committee in some cases.
Secondly, despite the absence of an initial court hearing to trigger the start of the moratorium, the degree of court involvement, and accompanying court discretion, is much more marked in the US than elsewhere. Most importantly, any plan is subject to court confirmation. The existence of a dedicated body of Bankruptcy Judges in the District and Circuit courts no doubt streamlines judicial involvement, but the cost of court and creditor committee involvement, even in cases where no examiner or trustee is involved, often reduce returns to creditors. In addition there is an office called the US Trustee which is a relatively new post in each State, and is involved in the appointment of trustees, examiners and the creditors committee.
Additional checks on the debtor in possession are that the court must approve payment out of any pre-petition unsecured creditors, there are restrictions on the use of secured book debts without court approval, and regular reporting requirements both to the court and creditors committee. There is a timetable of filing financial statements from soon after initial filing of the petition, and then court approval is required for remuneration of advisers and any compromises of existing litigation.
As stated above, at the termination of Chapter 11 there can be a relatively easy conversion to liquidation. Alternatively, if the plan is confirmed, the remaining assets re-vest in the pre-filing debtor once the plan is effected. However, it is important to point out two characteristics of Chapter 11 as a rescue procedure. Many plans contemplate liquidation, and indeed 90% of confirmed plans result in liquidation rather than reorganisation. Even in those cases where a plan is dismissed by the court or rejected by impaired creditors, there is nothing to stop the debtor filing for Chapter 11 again, or amending their existing proposal. This contrasts starkly with the Canadian procedure and that currently under discussion in the UK. There is also some evidence that there is a higher correlation between smaller or medium sized firms liquidating after or within Chapter 11 than is the case with larger firms. Indeed there have been legislative proposals for a separate, more streamlined procedure for such firms (a separate Chapter 13 exists for smaller estates of individual bankrupts) but to date nothing has been enacted.
In conclusion, Chapter 11 is a well-established procedure which is undoubtedly pro-debtor. It has received criticism has open to abuse by retention of existing management in control in most cases. While that is true, and while the checks and balances mentioned above cannot be seen to counter that criticism in their entirety, it is also true that the power of creditors means that often, existing management are dismissed as a condition of a successful plan. The delay involved in Chapter 11 proceedings is both inherent in the timetable (the 120 day exclusivity period followed by a period of negotiation) and in judicial extensions beyond that, and the delay causes real prejudice to undersecured creditors who do not receive interest on their claims from date of filing. Certainly the evidence suggests that Chapter 11 is an effective rescue procedure in larger cases, and that it is an effective formal procedure which facilitates bargaining among creditors. Secured creditors are adequately protected by several safeguards built into the law.
The Canadian BIA procedure can be seen as an improvement on its North American neighbour since there is a more rigid timetable, and reduced court involvement and discretion. Even with time limits in Chapter 11 legislation, the court clearly extends them in many cases, and the degree of discretion given to the court is probably unacceptable in terms of cost and predictability.
The ease of conversion to liquidation can be seen as an advantage, since it accords with reality, but the fact that there is no check on the number of refilings for Chapter 11 is open to abuse.
Canada
Along with Australia, Canada has passed the most sophisticated, balanced and potentially effective reorganisation legislation, avoiding most of the problems of delay and abuse possible under Chapter XI in the United States, yet avoiding the costs involved in the United Kingdom and to a lesser extent, Australia.
The main features of the Bankruptcy and Insolvency Act procedure are that a debtor may file either a proposal for a reorganisation (for example if the company is already in receivership), or a notice of mere intention to file one. (Creditors cannot file for a debtor's reorganisation, unlike in United Kingdom and Australia). A wide moratorium against creditor action is triggered for an initial 30-day period. However, a trustee has to attest to creditors the accuracy of the debtor's cash flow projections. The trustee's role is deliberately "light-handed", though he must report to the Official Receiver any "material adverse change" since the original filing. The court is not involved in initiation of the procedure, but where more than light monitoring is required, may be involved in defining the trustee's powers which could be quite wide. There is a very strict timetable during which the debtor must effect a proposal and, if it is not approved by creditors, automatic liquidation follows. While there is some judicial flexibility for extensions of the moratorium period, there is a maximum cumulative period beyond which the court cannot go under any circumstances.
Unlike the situation in Hong Kong, United Kingdom and Australia, in Canada a secured creditor who wishes to appoint a receiver over all or most of the company's business and assets, must give the debtor company ten days notice, during which time the company can file for protection. If the chargeholder is genuinely worried that assets may disappear in this time, it can apply to court for appointment of an interim receiver to safeguard the assets.
In addition to this reorganisation procedure in the Bankruptcy and Insolvency Act, as amended in 1992, there is an older rescue procedure available in the Creditors Companies and Arrangements Act, dating from the 1930s but revived by practitioners and the courts in the 1980s recession. This Act, which in 1997 was amended and doubled in length, has become the preferred vehicle for rescuing larger corporations, even thought it leaves considerable discretion to the courts. A classic example is the Olympia & York group, whose UK subsidiary went into simultaneous administration. The CCAA flexibility is preferred by stakeholders concerned with larger corporations, so that in reviewing the progress of the new insolvency legislation, the Federal government decided to retain the CCAA provisions, but to amend them, in particular by limiting them to companies or groups with minimum of $5 million outstanding liabilities.
While the BIA reorganisation procedure is relatively new, there is some empirical evidence now available as to its success. Emeritus Professor Jacob Ziegel, a recent visitor to the New Zealand Law Commission, and a colleague, undertook a study of all reorganisation filings (148) in the Toronto bankruptcy office between November `992 and December 31 1996, as well as interviewing stakeholders about the results of that study. While this is a limited local study, Toronto is of course the principal commercial centre of Canada. The new procedure certainly seems to have been popular. Since 1993 when it was introduced, there has been a 49% increase in corporate debtors filing for insolvency. Even if this cannot be entirely attributed to the new procedure, it certainly suggests that the more rescue-orientated regime has encouraged corporate debtors to initiate reorganisation proceedings. As one would expect, the majority (84%) of debtor filings are through the notice of intention to file route, since this is the simplest and buys the company time to formulate a proposal. As Ziegel and Sahni conclude, this explains the increase in filings since debtors have "little to lose"30 Of the 148 debtors who initiated reorganisation, only 78% proceeded to proposal stage. 33% of the 148 resulted in a proposal which was accepted by creditors and the court, and was fully implemented, and a further 6% were being implemented at the time of publication.
Thus, if one was looking for a "success rate" for the BIA procedure, this limited survey would put it at 39%. However, the other aspect of "success" is whether or not creditors were better off under the reorganisation than they would have been on liquidation. The survey concludes that the average estimated realisation rate for unsecured creditors under reorganisations studied was 44.65% as against 6.89% in bankruptcy. However, it also stated that the average of unencumbered assets as a percentage of total assets was 8.6% and in most cases, there were no unencumbered assets.
On important aspect of the BIA procedure which is highlighted by this research is that secured creditors do not have to be included within the reorganisation proposal. In only 24% of cases were they included. Given that in most Canadian insolvencies there are on average 4 secured creditors, who have charges over most or all of the debtor's assets, this means that the success of many of these proposals is dependent on the informal agreement of the debtor and key secured creditors, which agreement is no doubt secured at an early stage, so that unsecured creditors may not know the terms of such agreement when they vote on the proposals. 76% of the files indicated such arrangements outside of the terms of the proposal. The authors point out that although the extension of the moratorium to cover secured creditors in 1992 would prima facie seem a likely candidate to explain the increased popularity of the BIA reorganisation procedure between 1993 and 1996, this is countered by the fact that secured creditors have generally acquiesced in reorganisation proceedings and supported them through informal arrangements with debtors. Reasons why this might be so include that they may be well secured, that the general moratorium may improve the debtor's cash flow and thus returns to the secured creditor, and the cost of appointing a receiver as against leaving the debtor in possession under the eye of a trustee.
Ziegel and Sahni, while acknowledging that the increase in filings for reorganisation by debtors is largely attributable to the "little to lose" explanation, state that trustees and insolvency lawyers whom they interviewed supported the retention of the notice of intention to file procedure. So long as the larger number of reorganisation filings exceeds the higher failure rate induced by the notice of intention facility, unsecured creditors, they conclude, would be better off with this option being available to debtors. There is certainly no evidence that unsecured creditors have widely exercised their rights to initiate a termination of the reorganisation prior to seeing the debtor's proposal.31
However, there is no doubt that a regime such as this which allows debtors to initiate a blanket moratorium covering secured and unsecured creditors, will lead to some abuse. Under this system, there is no guarantee, once the moratorium has been triggered, that any proposal will emerge. At present there is an "erosion" rate of about 22% of cases where no proposal eventuates. This is the "downside" risk of such a regime, but as stated above, the question would be (a) whether anything can be done to reduce that erosion rate by way of monitoring by the trustee and (b) whether this is a fair price to pay if it results in a greater number of business rescues than would exist if the notice of intention procedure was not an option. The Canadian system already includes provision for the trustee to monitor the procedure, as mentioned above. However, Ziegel and Sahni question whether the trustee can currently be an effective gatekeeper, and suggest that there may be a need for a practitioner who is independent of the filing process, to actually certify whether or not the debtor may be able to make a viable proposal. On the other hand, in 74% of cases, debtors proceeded to file proposals with creditors within the initial 30-day period, so creditors got a chance to vote on the viability of the proposal without any outside assistance.
Hong Kong
A proposal for provisional supervision made in a Hong Kong review in 1996 is near to implementation. It is modelled closely on a combination of the Australian and UK position, and in fact is similar to what is being proposed as a new procedure in the UK at present. Thus there would be a "voluntary" debtor filing for a 28-day moratorium during which time a proposal can be put forward, but there is to be an independent professional, the supervisor who would oversee what is intended to be a short term procedure. One key controversial feature of the Hong Kong proposal is that secured creditors with a charge or charges over all or most of the company's assets and undertaking, can "opt out" of the supervision regime and continue to enforce their usual security rights. This is not so significant in Hong Kong where the lending pattern is not as traditional as in the UK. Hong Kong has wisely not retained any distinction here between fixed and floating charge, so provides a model of what such a provision might look like in a post - Personal Property Securities Act environment.
South-East Asian Nations
The 1998 financial crisis in South-East Asia has, with the insistence or encouragement of organisations such as the World Bank and Asian Development Bank, triggered a review or insolvency laws in many jurisdictions. Almost without exception, the insolvency laws of Asian nations derive from their European colonisers . However, the regimes have not been changed much since their enactment as colonial legislation. As noted above, Singapore already had a formal rescue procedure modelled closely on the UK administration order , and Hong Kong initiated a review in 1995 which will shortly lead to legislation. Japan also has rescue procedures, though they are in the process of reform. Many jurisdictions had provision for a court-ordered composition, with or without some moratorium effect. In the last two years in response to the crisis in the region, countries such as Malaysia, Thailand, Korea, Vietnam and Indonesia have legislated, or are in the process of legislating for, a more formal rescue procedure.Others such as the Philippines have some way to go in modernising their insolvency regimes.
In ascertaining whether the development of rescue procedures in this region can inform debate in New Zealand, several points can be made.
First, while fundamental issues such as who has control during the rescue process, who can initiate it, how will funding be dealt with and what rights should secured creditors have, arise in these jurisdictions as much as elsewhere, a number of differences can be noted which constrain law reformers there.
Cultural factors affect the use of insolvency regimes that do exist, and may shape reform initiatives. First, the stigma of failure permeates corporate insolvency in the Asian region to a greater extent than it does elsewhere, where family companies play a larger role. For this reason, existence of rescue procedures will only assist if directors can be encouraged to initiate or participate. The stigma factor which may be present in personal insolvency in New Zealand and elsewhere, does not permeate corporate insolvency to the same extent.
Secondly, this stigma and reluctance to use formal insolvency has meant that existing procedures such as liquidation and court composition have been little used, but that there has been a greater willingness in this part of the world to embrace negotiation, arbitration and informal work-outs. The latter has been taken further in the Asian financial crisis by development of Guidelines, usually with the assistance of a country's central bank, and these have been implemented in Hong Kong, Indonesia and Malaysia , Korea and Singapore in the last two years. In some cases, these have been confined to rescues of banks and financial institutions, in others they extend to all corporate debtors. This aspect of the developments in South-East Asia (which had also been seen in the Bank of England's London Rules) seems one that should be investigated.
Thirdly, one of the major obstacles which exist in some jurisdictions such as Indonesia relates to the infrastructure of the legal system and professions. There is not only corruption, but lack of education and training among those administering insolvency regimes in the courts and the private sector.
Lastly, there is a degree of political and executive control over formal rescue procedures in some jurisdictions such as Pakistan and Philippines, which may be evident through quasi-judicial processes or central agencies initiating the process or retaining control.
Some of the jurisdictions have formal rescue procedures reserved for public or other large companies only.
In conclusion, it is unsurprising to find that the insolvency regimes of Singapore and Japan are already well advanced and comparable to major Western nations, and that Hong Kong, Malaysia are in the process of discussing corporate rescue regimes (Thailand enacted a court-ordered rescue procedure along the lines of the UK system for larger companies, in 1998 which has been used in some major insolvencies).
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