FAIR Session III Managing Major Asian Collapses: The Importance of Insolvency Frameworks for Foreign Direct Investment and Risk Management in Asia - PowerPoint PPT Presentation

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FAIR Session III Managing Major Asian Collapses: The Importance of Insolvency Frameworks for Foreign Direct Investment and Risk Management in Asia

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The Importance of Insolvency Frameworks for Foreign Direct Investment and Risk ... Enron Directo SA (2002), Brac Rent-a Car (2003), Daisytek (2003) and Parmalat (2004) ... – PowerPoint PPT presentation

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Title: FAIR Session III Managing Major Asian Collapses: The Importance of Insolvency Frameworks for Foreign Direct Investment and Risk Management in Asia


1
FAIR Session IIIManaging Major Asian
CollapsesThe Importance of Insolvency
Frameworks for Foreign Direct Investment and Risk
Management in Asia

2
Overview of Session
  • Ron Harmer, International Consultant to the ADB

3
Overview 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

4
Overview 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

5
Overview 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

6
Overview 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

7
APP Case Study
  • Michael Sloan, Blake Dawson Waldron

8
APP Case Study
  • APP incorporated in Singapore
  • Operations throughout Asia
  • US 13.9 billion collapse
  • Lenders, shareholders and bondholders affected
    worldwide

9
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10
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11
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12
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13
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14
Subsidiaries
Australia Belgium British Virgin
Islands China France Hong Kong India
Indonesia Italy Japan Malaysia Spain Singapore T
aiwan UK USA
15
Lenders
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
16
Shareholders
China France Germany Indonesia Japan Netherlands S
ingapore Switzerland UK USA
17
APP 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

18
APP 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

19
Dealing with multi-national administrations
  • Ron Harmer, International Consultant to ADB

20
European 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

21
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22
EUR 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.

23
EUR 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.

24
EUR 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.

25
EUR 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.

26
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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)

28
Brac 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

29
Enron 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

30
Daisytek 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

31
Daisytek 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.

32
Daisytek 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.

33
Parmalat 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

34
Parmalat (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

35
Insolvency 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

36
Insolvency 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

37
Insolvency 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)

38
Insolvency 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)

39
Insolvency 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)

40
Comparisons with the Uncitral X Border Model Law
  • No experience of it
  • Adopts similar jurisdiction criteria to that of
    the EUR

41
How 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)

42
Relevance 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

43
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44
Economic 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

45
Economic Rationale for Reform
  • Michael Sloan, BDW

46
Sizes of economy
Source of data The World Bank Group
47
Trade in goods as a share of GDP
Source of data The World Bank Group
48
Present value of debt in 2002
Source of data The World Bank Group and the
Korean Ministry of Finance and Economy
49
Economic Rationale for Reform
  • Investment flows linked to quality insolvency
    laws
  • Weak insolvency systems result in longer and
    deeper recessions

50
Economic 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

51
Adequacy of Liquidation Laws and their application
52
Adequacy of Rescue Laws and their application
53
Attitude of International Investors to Inadequate
Insolvency laws
  • Stanley Tai, New York Life International LLC
  • Nagarajan Srinivasan of the Indian Commonwealth
    Development Corporation.

54
Solutions
  • Ron Harmer, Consultant BDW

55
Major 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

56
Institutional Capacity
  • Quality laws not sufficient, need institutional
    capacity
  • Problems include
  • Lack of fairness in trials
  • Corruption
  • Lack of expert judges
  • Lack of qualified professionals

57
Institutional 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

58
Out 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

59
Cross 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.

60
Solutions Informal Workout Principles
  • Adoption of Informal Workout Protocols by Banking
    Associations

61
Facilitation 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
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