Title: FAIR Session III Managing Major Asian Collapses: The Importance of Insolvency Frameworks for Foreign Direct Investment and Risk Management in Asia
1FAIR Session IIIManaging Major Asian
CollapsesThe Importance of Insolvency
Frameworks for Foreign Direct Investment and Risk
Management in Asia
2Overview of Session
- Ron Harmer, International Consultant to the ADB
3Overview of Session
- Insolvency laws part of systemic risk management
infrastructure of region and countries - Only one country - Japan - has a modern cross
border insolvency regime in Asia - Proposals developed in Korea and the Philippines
- No viable formal means of dealing with a
pan-Asian collapse in spite of increasing
interdependence -
4Overview of Session
- Complete inability for dealing with major
corporate collapses in Asia adversely impacts on
systemic risk management - Asian Pulp and Paper exemplifies the need to
reform of cross border insolvency regimes - Michael Sloan to present APP case study
5Overview of Session
- Regional treaty for cross border insolvency law
reform is an option - Lessons can be learned from initial difficulties
with EEC cross-border insolvency regulation - Ron Harmer to review the EEC experience
- Economic arguments in favour of insolvency law
reform - Michael Sloan
6Overview of Session
- Insolvency law reform will aid attraction of
foreign investment - Stanley Tai of the New York Life International
LLC and Mr. Nagarajan Srinivasan of the Indian
Commonwealth Development Corporation. - Possible regional solutions
- Ron Harmer
7APP Case Study
- Michael Sloan, Blake Dawson Waldron
8APP Case Study
- APP incorporated in Singapore
- Operations throughout Asia
- US 13.9 billion collapse
- Lenders, shareholders and bondholders affected
worldwide
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14Subsidiaries
Australia Belgium British Virgin
Islands China France Hong Kong India
Indonesia Italy Japan Malaysia Spain Singapore T
aiwan UK USA
15Lenders
Austria Bahrain Belgium Canada China Denmark Finla
nd France Germany Hong Kong Indonesia
Italy Japan Netherlands Norway Singapore South
Africa Spain Sweden Taiwan Thailand UK USA
16Shareholders
China France Germany Indonesia Japan Netherlands S
ingapore Switzerland UK USA
17APP Case Study
- 12 March 2001 unilateral debt standstill
announced by APP - Application in Singapore for appointment of
judicial managers - Basis for application
- Unilateral declaration of Standstill
- Lack of progress with Standstill
- Need for independent control
18APP Case Study
- APP successfully resisted application due to
- Lack of creditor support
- Inability of judicial mangers to take effective
control of group - No reorganisation plan agreed yet
19Dealing with multi-national administrations
- Ron Harmer, International Consultant to ADB
20European Insolvency Regulation
- An ambition of the Treaty of Rome (1960)
- Attempt at a convention failed (2001)
- Commenced life as a regulation (31 May 2002)
- Now applies to 25 member states (Denmark is the
only exception binds all accession states) - Deals solely with cases of insolvency in which
the debtor has its centre of main interests or an
establishment in at least one of the member
states
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22EUR Jurisdiction
- Article 3.1 The courts of a Member State
within the territory of which the centre of a
debtors main interests is situated shall have
jurisdiction to open insolvency proceedings. In
the case of a company or legal person, the place
of the registered office shall be presumed to be
the centre of main interests in the absence of
proof to the contrary.
23EUR Jurisdiction (continued)
- Recital 13 to the preamble of the EUR states
The centre of main interests should correspond
to the place where the debtor conducts the
administration of his interests on a regular
basis and is therefore ascertainable by third
parties.
24EUR Applicable Law and Effect of Opening
- Article 4 states that the law applicable to an
insolvency proceeding shall be the law of the
member state in which the proceedings are
opened. - Article 16 states that any judgment opening
proceedings that is handed down in a Member State
shall be recognised in all other Member States.
25EUR Public Policy Provision
- Article 26 states that a Member State may refuse
to recognise insolvency proceedings opened in
another stateif the effects of such
recognitionwould be manifestly contrary to the
states public policy and.its fundamental
principles or the constitutional rights and
liberties of the individual.
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27 EUR COMI Use and Practice
- Statistical and other information is not provided
- Many decisions are unreported
- UK/Irish decisions suggest problems with issues
of jurisdiction - Consider cases of Enron Directo SA (2002), Brac
Rent-a Car (2003), Daisytek (2003) and Parmalat
(2004)
28Brac Rent-a-Car case
- Brac was incorporated in Delaware, USA
- It never traded in USA
- Its operations were conducted in England
- The English court held that insolvency
proceedings could be opened in England because
its COMI was in England
29Enron Directo case
- Enron Directo was incorporated in Spain
- It conducted its daily operations there
- English court held that insolvency proceedings
could be commenced against Enron Directo in
England on the basis that the head office
functions of Enron Directo were run from the
European headquarters of Enron Directo which was
situated in London
30Daisytek case
- Holding (or parent company) incorporated in
England - Three, wholly owned by the parent, subsidiaries
were incorporated in Germany and one in France - English court opened insolvency proceedings in
respect of all four subsidiaries on the basis
that their respective COMI was in England because
most of the trade creditors considered that the
important functions of the subsidiaries were
carried out in England, in the office of the
parent
31Daisytek case (continued)
- Insolvency proceedings were brought in France in
respect of the French subsidiary and in Germany
in respect of one of the three German
subsidiaries - In France, court of first instance determined
that the COMI of the French subsidiary was in
France and purported to open main proceedings
accordingly. That was overturned on appeal.
32Daisytek case (continued)
- In Germany, court of first instance opened main
proceedings in respect of the subsidiary. On
appeal the German proceedings were closed,
following a finding that the manager of the
German subsidiary had authorised the English
proceedings.
33Parmalat case
- Parmalat SpA was incorporated in Italy in
- It commenced life in Collecchio, Italy as a
producer of dairy products - Although itself controlled by a family group,
Parmalat spread throughout Europe, South America,
Asia and Australia
34Parmalat (continued)
- It performed this growth through a 20 year long
acquisitions policy - That policy was financed through offshore
financing vehicles, including Eurofood IFSC
Limited (Eurofood) - Eurofood was incorporated in Ireland
- It was a single purpose vehicle formed for the
purpose of raising USD150 million through a bond
issue
35Insolvency of Parmalat
- A massive hole of some USD7 billion in the assets
of Parmalat SpA was discovered in December 2003 - The Italian government, acting under a decree
passed on 23 December 2003, placed Parmalat under
extraordinary administration on 24 December and
appointed a special commissioner
36Insolvency of Eurofood
- Eurofood is incorporated in Ireland
- It is a wholly owned subsidiary of Parmalat SpA
- On 27 January 2004, Bank of America filed a
winding up petition against Eurofood in the High
Court of Ireland - On the same day the Irish court appointed a
provisional liquidator to Eurofood
37Insolvency of Eurofood (continued)
- On 9 February 2004 the Italian government
purported to place Eurofood under extraordinary
administration and appointed Bondi as special
commissioner (subsequently confirmed by an
Italian court on 20 February)
38Insolvency of Eurofood (continued)
- On 23 March 2004, the Irish court determined
that - The Italian court lacked jurisdiction (because it
could not ignore the Irish decision of January
2004) - The COMI of Eurofood was in Ireland (because it
was incorporated there and because that was where
its creditors believed its COMI to be) - The decision of the Italian court was against
public policy (because no notice and no
opportunity was given to the Irish creditors to
be heard in the Italian proceedings)
39Insolvency of Eurofood (continued)
- An appeal was made to the decision of the Irish
court - The appeal court, although it upheld the judgment
of the Irish court, referred two matters to the
European Court of Justice - Whether the Irish or Italian courts had opened
main proceedings - Whether the Irish court was entitled to invoke
Article 26 of the EUR (the public policy issue)
40Comparisons with the Uncitral X Border Model Law
- No experience of it
- Adopts similar jurisdiction criteria to that of
the EUR
41How big is the problem of COMI under the EUR?
- It may be argued that the problem should be
confined and should not be regarded as a general
issue concerning COMI (and consequent forum
shopping) but rather in the failure of the EUR
to deal with that issue in the context of groups
of companies and associated companies (note that
the Uncitral X Border Model Law is also silent on
this issue) - There is an absence of a provision in the EUR
that requires co-operation between courts, judges
and administrators (cf. UNCITRAL Model Law)
42Relevance for Asia
- Any bi or multi-lateral cross-border arrangements
should address more particularly the issue of
COMI (or similar) - Particular provisions concerning the approach to
be taken in respect of groups/ related/or
associated companies may be desirable and
necessary
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44Economic Rationale for Reform
- Asian economies linked to global economy
- Degree of dependence on international trade
- Level of foreign investment
- Degree of foreign ownership of share market
- Overseas debt
- Insolvency laws
- Dont yet recognise globalisation
- Weak protection of domestic and international
interests
45Economic Rationale for Reform
46Sizes of economy
Source of data The World Bank Group
47Trade in goods as a share of GDP
Source of data The World Bank Group
48Present value of debt in 2002
Source of data The World Bank Group and the
Korean Ministry of Finance and Economy
49Economic Rationale for Reform
- Investment flows linked to quality insolvency
laws - Weak insolvency systems result in longer and
deeper recessions
50Economic Rationale for Reform
- Weak governance systems
- Discourage investment
- Increase price of capital
- Weak insolvency systems could
- Undermine effectiveness of bond markets
- Discourage investment in bond markets
51Adequacy of Liquidation Laws and their application
52Adequacy of Rescue Laws and their application
53Attitude of International Investors to Inadequate
Insolvency laws
- Stanley Tai, New York Life International LLC
- Nagarajan Srinivasan of the Indian Commonwealth
Development Corporation.
54Solutions
- Ron Harmer, Consultant BDW
55Major Corporate Collapses
- No ability to deal with a major Asian corporate
collapse - Need to implement law reform
- Options include regional treaty and model law
- Not mutually exclusive
- Treaty preferred option at present
- Also require informal workout protocols to
operate across borders
56Institutional Capacity
- Quality laws not sufficient, need institutional
capacity - Problems include
- Lack of fairness in trials
- Corruption
- Lack of expert judges
- Lack of qualified professionals
57Institutional Capacity
- No quick fix but measures to improve include
- Develop rules for communications between courts
- Employment of Interpreters
- Development mutual understanding by judicial
conferences and exchange of information between
courts - Development of court protocols
58Out of Court Proceedings
- Courts do not have to be involved in all areas of
an insolvency administration - Out of court processes possible
- United Kingdom, Singapore, Hong Kong, China and
Australia all have out of court processes - Introduction of such frameworks in Asia may
circumvent some issues around institutional
capacity
59Cross Border Treaty
- A regional cross border treaty would assist in
dealing with major corporate collapses - That treaty must address
- Issues surrounding the definition of the location
of the centre of main interest for a group of
companies - Cooperation between courts
- Formalities required for commencement of an
application for recognition - Recognition for both 'in-bound' and 'out-bound'
insolvency administrations - the effect of recognition
- cooperation between courts
- the possible approaches to accommodating
different types of insolvency administrations - evidence required of commencement of insolvency
administrations - the formalities required for commencement of an
application for recognition. -
60Solutions Informal Workout Principles
- Adoption of Informal Workout Protocols by Banking
Associations
61Facilitation Agreement
Administrative Committee
Financial Institution Creditorsgt10 Initiate
Workout
Initial Standstill Period
First Meeting of Financial Institution Creditors
Extended Standstill
No Workout
Workout Committee
Standstill Ends
Negotiate Workout Agreement
No Cooperation by Creditor
Extended Standstill
No Workout
FIC Meeting to Consider Workout
Standstill Ends
No Workout
Workout Agreement
Standstill Ends
Failure
Success