Comment - Clare Wee

Comment

Clare Wee (1)
Senior Counsel and Deputy Head
Private Sector Legal Group
Asian Development Bank

From a review of the 2003/2004 Guide, it is clear that Asia has continued to ride the wave of insolvency reforms. Several of the commentators in the Guide highlight that since the Asian financial crisis, there has been a ‘clamour for reform’ which has resulted in the passing of new laws.

Cross-border insolvency
Notably, new laws have been put in place to address cross-border cooperation and assistance. As discussed in the relevant chapter, Japan has enacted a law relating to the Recognition and Assistance for Foreign Insolvency Proceedings, which is an example of a modified version of the UNCITRAL Model Law on Cross-Border Insolvency (UNCITRAL Model Law). Australia and New Zealand are considering the adoption of the UNCITRAL Model Law; and the Republic of Korea is considering the adoption of a hybrid version of the UNCITRAL Model Law. The Philippines is considering the adoption of a provision based in part on Section 304 of the United States Bankruptcy Code. These are encouraging signs as a sound insolvency system includes a fair and efficient regime for recognising cross-border insolvencies. It is hoped that reforms in this area will be ahead of, and predict, the growth of regional financial markets in Asia.

Non-performing loans
Also to be counted among the relative reform successes is the use of specialised institutions to address the systemic problem of non-performing loans (NPLs). A review of the chapters on the Republic of Korea, Thailand, People’s Republic of China, Malaysia and Indonesia highlights that many of the specialised institutions put in place to address the large numbers of non-performing loans were relatively successful. The Malaysia chapter, for example, states that the special administration process under the Danaharta Act was viewed ‘as a more effective restructuring tool’. These workout regimes were adopted in some of the jurisdictions covered by this Guide, including the Republic of Korea, Thailand and Indonesia. Regrettably, despite the relative success of these specialised institutions, the NPLs in the People’s Republic of China; Hong Kong, China; Thailand, Malaysia and Indonesia continue to be a source of concern. In the People’s Republic of China for example, there was an estimated US$500 billion in non-performing loans, representing 22 per cent of its total loan portfolio at the end of June 2003. The lesson to be learned is that such forbearance by governments is incompatible with, and destructive to, an efficient and well-functioning financial system. Going forward, provisions must be put in place to address the handling of corporate debt once the specialised institutions are closed in accordance with their limited mandates and tenures. Further, it is essential that governments remain committed to fully resolving their NPLs and to considering the provision of incentives to encourage investment.

Liquidation
With the insolvency reform revolution, many Asian economies now have adequate insolvency regimes (2), while others have made huge strides by enacting legislation that incorporates internationally-recognised standards. It must be recognised that Asia has achieved in less than a decade, what the more so-called developed countries have taken centuries to achieve. Articulating such internationally-recognised standards is an important step forward, as is the passage of new laws.

However, when one reviews the reforms that have been undertaken, it appears that the focus was primarily on introducing the restructuring process. Very little notice was given to the remedy of liquidation. A survey of the insolvency regimes covered by the Guide indicates that with notable exceptions (Singapore, Malaysia and Hong Kong, China) many of the jurisdictions still do not have well-functioning and effective liquidation processes. Additionally, many do not provide for the conversion from rescue to liquidation. Without the threat of liquidation, it is difficult to bring dissenting creditors to the negotiation table. Without liquidation, economic resources are wasted on restructuring companies that are not viable as ongoing businesses. It is suggested that priority be given to strengthening the remedy of liquidation – the basic infrastructure of any insolvency regime. For the time being however, the threat of liquidation will ring hollow, and dissenting creditors will continue to have their day.

Governance
By far the most divisive factor to well-functioning insolvency regimes is the rule of law deficit that exists in varying degrees in so many Asian countries. The Pakistan chapter states that “debt recovery has always been a problem in Pakistan, despite the presence of a well-defined legal framework for it.” This epitomises the ‘implementation gap’ that exists in many DMCs today and underscores that basic preconditions must exist for the proper functioning of any law, including insolvency laws.

After all, insolvency law must be placed in context. It is but a part of the commercial law system and financial infrastructure of any economy.(3) Ultimately this implies that insolvency systems and processes cannot be divorced from the broader challenges of law and development. They are a subset of the rule of law. As such, insolvency and restructuring, particularly in DMCs, must be considered in the context of prevailing economic, political, social, cultural and governance conditions.

It is important to recognise that recent insolvency reforms will not be fully implemented in Asia until governments strengthen the four key components of governance – accountability, transparency, predictability and participation. Without these, the implementation of insolvency laws in these countries is likely to remain poor. For example, the Indonesia chapter points out that in reality, the commercial court has so far not consistently interpreted a key element of any insolvency regime – the bankruptcy test. The Philippines chapter states that ‘it can take several years before results, if any, are realised… proceedings in the trial court may last from between one to four years. If the case is brought all the way to the Supreme Court, it may take from six to ten years or even longer.’ Yet, both Indonesia and the Philippines have legal systems that are well established and based on principles that, in theory, meet international standards in some respects.

In other words, in many of Asia’s developing countries, systemic problems with legal frameworks continue to undermine the efficiency, and ultimately, the legitimacy of legal, judicial and law enforcement institutions; and to undermine the ability of governments to implement their development policies, particularly those that look to the private sector as engines of economic growth. Among the systemic problems found in many of ADB’s DMCs are prolonged delays in court hearings, weak or untrained lower court judges, lack of trained insolvency case administrators, archaic case management systems and the absence of training programmes and facilities.

Additionally, throughout East Asia, Southeast Asia and South Asia, the economic power of family business groups and their controlling individuals and families deeply influence government. With respect to insolvency, there have been numerous highly visible and notable restructurings that have failed because of the ‘institution’ of influence by elite interests.

While reformers are attempting to reduce the power of family-owned business groups, resistance is strong. It is fair to say that despite half a decade of attempts, policymakers have not yet been able to effectively implement policies that address the issues related to the power of family-owned business groups. It is wishful thinking to anticipate that family-owned and family-controlled corporations are going to vanish from the Asian business landscape, even in the medium-term. The cultural and social norms and values underpinning the importance of family in Asia are too deeply rooted to be quickly overturned.

While personal relationships are essential for doing business in any economy, it should not rise to the level of patronage, cronyism or corruption if there are institutional and legal frameworks that ensure against their abuse. Where rules and public sector legitimacy are tenuous, reciprocal favouritism flourishes and it is this favouritism
that is anathema to broad wealth creation and economic development.

In such jurisdictions, efforts should be directed at restoring the faith of the public in the legal system. Equally important, it is suggested that ‘relationship financing and banking’ is regulated and controlled through sound macroeconomic management, the development of a strong banking sector, a deep equity and bond market, and transparent rules and laws that are firmly and fairly implemented.

Meanwhile, the reader is cautioned that the practice of insolvency law in these jurisdictions is likely to be unpredictable and something of a gamble.

1 The views of the author do not necessarily reflect the views or position of the Asian Development Bank, or its Board of Directors, or the governments they represent. The ADB does not guarantee the accuracy of the data included in this Comment and accepts no responsibility for consequences arising from its use. The term ‘country’ does not imply any judgment by ADB as to the legal or other status of any territorial entity.

2 In the 2001 Guide, the Introduction by ADB contained a presentation of restructuring processes, the forms they may take and their importance to the development and stability of the commercial law systems of the 11 Asian jurisdictions covered by the 2001 Guide. The Introduction also provided an overview of the insolvency regimes in the 11 Asian jurisdictions covered by the 2001 Guide. The Introduction deserves close attention as much of the material covered there remains relevant today. It is accessible on ADB’s website www.adb.org:
[http://www.adb.org/Documents/Reports/Restructuring_Asia/default.asp].

3 For example, weak corporate governance results in considerable havoc to any form of insolvency law endeavour. Although this is not the task of an insolvency law regime to address, it cannot be ignored because such a regime cannot be expected to operate and to produce positive results in an environment of inadequate corporate governance and financial irresponsibility. See ADB Introduction to the 2001 Guide.