Insolvency Law in East Asia

Roman Tomasic, Roman Tomasic

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317115984
• Edition: 1
• Topic: Diritto
• Subtopic: Diritto fallimentare

Insolvency law reform has become a subject of public urgency in many countries in the past two decades and particularly in much of Asia over the last ten years. This volume provides an overview of insolvency laws and related rules and procedures in the countries of East Asia. The book comprises two introductory chapters dealing with issues such as legal culture and cross-border insolvency, before examining the fourteen principal jurisdictions in the region. Each chapter addresses the key themes of different insolvency regimes, such as: the legal system and culture; personal insolvency laws; corporate insolvency rules; court-based schemes of arrangement; winding-up procedures; liquidators; enforcement; and offences. This title will be an invaluable guide to academics, practitioners and policy makers working in the areas of comparative and commercial law.

Chapter 1
Diversity and Convergence in Insolvency Laws in East Asia

ROMAN TOMASIC
Victoria University, Melbourne

This volume seeks to provide an overview of insolvency laws and related rules and procedures in the countries of East Asia. This introductory chapter seeks to provide a brief introduction to the field of insolvency law reform as it has occurred in East Asia over the last decade and especially since the 1987 Asian financial crisis. There are fourteen chapters which each look at the principal jurisdictions in this region,1 as well as two other general chapters dealing respectively with issues such as legal culture and cross-border insolvency. This book is a successor volume to Company Law in East Asia that was published in 1999 by Ashgate.2 It also picks up themes raised in an earlier empirical study on insolvency law and practice in Asia which saw the value of systematic comparisons of different insolvency regimes.3 The preparation of this volume has also benefited from the vigorous practitioner debate in regard to insolvency law reform that has in part been funded and organised by a range of multilateral bodies, such as the Asian Development Bank and the OECD, and most vividly articulated in the annual meetings of the Forum on Asian Insolvency Law Reform.

Insolvency law reform has become a subject of some public policy urgency in many countries over the last two decades, and this is especially so in many parts of Asia over the last decade. Many countries have been seeking to overhaul their existing laws with a view to bringing them more closely into line with international standards of best practice. Such standards have been developed by such multilateral bodies as the Asian Development Bank,4 the World Bank,5 the IMF,6 the OECD7 and UNCITRAL8 as well as by practitioner communities such as INSOL International.9 Ad hoc groupings such as the Forum for Asian Insolvency Reform (FAIR)10 have also greatly contributed to the development of insolvency ideas in Asia; their proceedings have been disseminated widely through the OECD.

These efforts have sought to create a degree of convergence in basic insolvency procedures across different jurisdictions, as well as a greater recognition of orders made in insolvency proceedings taking place in other jurisdictions. Understandably, this has been a slow process but it has generally been moving forward. However, given the pace of globalisation and international trade, an insolvency system that accords with generally accepted principles is widely seen as a means of facilitating risk taking and investment by foreign companies.

All of the above kinds of bodies have worked to develop guidelines, broad standards and model laws relating to insolvency. This has been a great start, but the success of insolvency law reform initiatives in Asia has also depended greatly on the appropriateness of proposed insolvency law reforms to local conditions as well as the degree to which it has been possible to effectively implement these reforms; this suggests that the social, historical and cultural contexts in which insolvency law reforms occur are quite crucial.11 This has led the World Bank and others to focus upon the problem of risk management in insolvency law reform efforts. Also, sociologists Halliday and Carruthers refer to what they describe as the problem of insolvency risk management (IRM).

These writers argue that the: ‘… establishment of an effective IRM system depends on the successful interplay of three processes: design, lawmaking, and implementation. Without as much attention to the processes by which laws are made and the impediments to implementation, no matter how sophisticated the design it will not succeed.’ Halliday and Carruthers also argue that there is a considerable degree of interdependence of different variables in the reform process and, as a consequence, ‘[n]o part of an insolvency system can be successfully implemented without adequate understanding of how it relies upon and contributes to the functioning of other elements in the system.’12 This makes it very difficult to simply seek to uncritically transplant an insolvency regime from a developed country in one part of the world to a developing country in Asia. Having said this, it is useful to look at some of the broad insolvency law reform efforts that are currently taking place.13

The Asian Development Bank has played a leading role in supporting the development of insolvency law reform in Asia. It has funded law reform initiatives in China over the years as well as supporting various international conferences aimed at spreading advanced insolvency ideas. Speaking in November 2004 at the fourth meeting of the Forum on Asian Insolvency Reform (co-sponsored by the Asian Development Bank, the World Bank and the OECD), Louis de Jonghe, the ADB’s country director of India, observed that:

ADB is committed to join its member countries, development partners, and other stakeholders, to undertake the journey to reform insolvency laws and systems. Indeed, ADB has long been associated with such reforms … ADB has contributed to insolvency law reform, primarily through the provision of country-specific technical assistance, as well as through our loan projects with insolvency components, since the 1970s. In addition to country-specific assistance, ADB’s work concerning insolvency and secured transactions has helped to articulate some of the core principles that underlie all well-functioning financial systems … [B]etter substantive laws on insolvency are a necessary condition for the development of a market-based economy, but alone, cannot achieve this in the absence of a proper enforcement machinery …14

In 2000 the ADB published an influential report by Ronald Harmer on ‘Insolvency Law Reforms in the Asian and Pacific Region’. Harmer had been responsible for drafting the Australian corporate insolvency law reforms that were introduced in the early 1990s and had been involved in a number of multilateral insolvency law reform initiatives.15 The 2000 ADB report sought to advance a number of ‘good practice standards’ which were applicable to corporate insolvency; this report also assessed whether these standards had been accepted into the laws of eleven Asian legal jurisdictions.16 The legal jurisdictions covered in this report did not include the People’s Republic of China, but included Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Japan, Singapore, Taiwan and Thailand.

Whilst acknowledging that standards may not always fit neatly with a particular country’s systems and traditions, Harmer has noted that there are still some ‘common basic policies and principles of approach in the insolvency law regimes of countries with different legal traditions.’17 He added that because there are some basic common features related to the operation of companies, this suggests that there should be some similar laws or principles regarding the financial viability and stability of such companies. Harmonisation of insolvency standards may also arise from the similarity in needs and expectations found within the commercial community. Harmer has labelled these as: (1) the need for certainty and predictability in commercial affairs; (2) the need for sensible commercial stability and order; (3) a need for commercial efficiency; (4) a need for fair commercial or equitable treatment; and (5) a need for transparency. These parallel some of the principles that underlie many national bodies of insolvency law.18

The ADB’s ‘Good Practice Standards’, as developed by Harmer, are worth paraphrasing and setting out; these include the following general propositions:

1. There should be a clear distinction in any legal system between corporate insolvency and personal or individual bankruptcy.19

2. The same insolvency regime should apply to all types of corporations, whether they be state owned or privately owned.20

3. Ideally, any insolvency regime should provide for both corporate rescue and winding up within the same law; this suggests the existence of two systems within any one insolvency law regime, allowing for a movement to liquidation where the rescue or reorganisation efforts have failed.21

4. Easy access to the use of legal mechanisms should be available to a debtor, such as a simple trigger of presumed insolvency (for example, an inability to pay a matured debt as and when it is due).22

5. In the event of a liquidation, if it is decided that a company should be liquidated due to inability to pay its debts, an independent manager should be appointed to run the company and conduct the liquidation, and the powers of existing management should be terminated.23 In regard to a reorganisation, an independent administrator should be able to take over...