APAC R&I G 2013 N B a 29/07/13 12:32 PM Pa 1 · APAC R&I G 2013_N_B a 29/07/13 12:32 PM Pa 8. A guide to Asia Pacific restructuring and insolvency procedures 9 ... o rmg r oss negligence

A guide to Asia Pacificrestructuring andinsolvency procedures

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Foreword


A guide to Asia Pacific restructuring and insolvency procedures 3

We are pleased to introduce our new publication on restructuringand insolvency procedures in the Asia Pacific region.

It is designed to provide you with our commercial insights into thematrix of diverse legal systems across the region. It combines ourglobal standards of business and law with local excellence toprovide you with a resource to meet your needs whether it be atthe outset of a transaction to ensure that it is structured in a wayto maximise returns, or when looking to exit by minimising risksand exposures, wherever they arise.

This multi-jurisdictional guide is just a flavour of the expertise andtechnical knowledge that we have accumulated in the region overthe last few decades. Since the 1997 Asian financial crisis, wehave had significant input on many of the most prominentrestructurings and corporate insolvencies and we continue toadvise on some of the most innovative and progressive deals inthe Asia Pacific region.

The guide contains insights into 13 different jurisdictions within theAsia Pacific region including Australia, China, Hong Kong SAR,India, Japan, and Singapore. It aims to assist when assessingcredit risks and potential impacts of formal insolvency procedureson realising security across the Asia Pacific region and contains auseful comparative table on issues such as the automatic stay,the ability to cram down dissentient creditors, and potentiallender liability.

The guide exemplifies the power of collaboration, collegiality andteamwork that we have in our offices worldwide and amongst our“preferred firms” network to ensure that you get the widestpossible coverage and in depth local knowledge. In this regard,we would like to acknowledge and express our sincere gratitudeto the following firms who have kindly contributed the chapterson India, Indonesia, Korea, Philippines, Malaysia, Taiwan andVietnam: AZB & Partners; Mochtar Karuwin Komar; Bae, Kim &Lee LLC; Chooi & Company; Belo Gozon Elma Parel AsuncionLucila; Russin & Vecchi; and Vilaf.

Foreword

Mark HydeGlobal Head of Restructuring and Insolvency

This Guide does not purport to be comprehensive or constitute legal advice. It is only a guide. The information and the laws referred to are correct as of June 2013 but may change quickly. If you would like any advice or further information on anything contained in this guide, please contact Clifford Chance.This handbook is copyrighted material. No copying, distribution, publishing or other restricted use of this handbook is permitted without the written consent of Clifford Chance.

Contents


Comparison table ........................................................................................................................................................................... 6

Australia.......................................................................................................................................................................................... 13

China.............................................................................................................................................................................................. 27

Hong Kong..................................................................................................................................................................................... 35

India ............................................................................................................................................................................................... 47

Indonesia ........................................................................................................................................................................................ 57

Japan ............................................................................................................................................................................................. 65

Korea.............................................................................................................................................................................................. 75

Malaysia ......................................................................................................................................................................................... 87

The Philippines .............................................................................................................................................................................. 97

Singapore ....................................................................................................................................................................................... 107

Taiwan ............................................................................................................................................................................................ 117

Thailand.......................................................................................................................................................................................... 125

Vietnam .......................................................................................................................................................................................... 133

Contents



6 A guide to Asia Pacific restructuring and insolvency procedures

Comparison tableRehabilitation, moratoria, enforcement and cram down

Australia China Hong Kong SAR India Indonesia Japan

Rehabilitation procedureavailable

VoluntaryAdministration

Rectification No statutoryprocess.

Provisionalliquidators insomecircumstancesare grantedpowers by thecourt to formulaterestructuringplans.

Reorganisation Suspension ofPayments

CivilRehabilitation

Automatic moratoriumon claims againstthe company

VoluntaryAdministration

Scheme ofarrangement

Rectification Compromise Bankruptcy

Provisionalliquidatorappointment

Liquidation

Reorganisation Bankruptcy Suspension of

Payments

CorporateReorganisation

CivilRehabilitation

Enforcement still possibleby secured creditorsduring moratoriumwithout court approval

VoluntaryAdministration:unless initiatedwithin 13 days ofnotice ofappointment ofadministrator.

Rectification Compromise Bankruptcy

Provisionalliquidatorappointment

Liquidation

Not applicable. Bankruptcy (freeto enforce after90 days).

Suspension ofPayments

Bankruptcy Civil

Rehabilitation Corporate

Reorganisation

Cram down of creditors(voting thresholdsrequired to bindall creditors)

VoluntaryAdministration/Deed of CompanyArrangements:– Approval of

creditorsrepresenting morethan 50% innumber and 50%in value.

Scheme ofArrangement:– Approval of each

class of creditorsrepresenting morethan 50% innumber and 75%in value.

Rectification:– Approval of each

class of creditors.– Approval of

creditorsrepresenting morethan 50% innumber and 662/3%in value.

– Court approvalrequired.

Compromise:– Approval of

unsecuredcreditorsrepresenting morethan 50% innumber and 662/3%in value.



class of creditorsrepresentingmore than 50%in number and75% in value.


Reorganisation:– Approval of

creditorsrepresentingmore than 50% innumber and 75%in value.

Suspension ofDebt Payments:– Approval of

unsecuredcreditorsrepresentingmore than 50%in number and662/3% in value,and approval ofsecuredcreditorsrepresentingmore than 50%in number and662/3% in value.

Civil Rehabilitation:– Approval of

creditorsrepresentingmore than 50%in number and50% in value.

CorporateReorganisation:– Approval

required bydifferent classesof creditors withvarious majoritythresholds.



Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam

CorporateRehabilitation

Scheme ofArrangement

Rehabilitation JudicialManagement


Reorganisation Composition

BusinessRehabilitation

RestorationProcedure

CorporateRehabilitation


Rehabilitation Liquidation

JudicialManagement

Scheme ofArrangement (butavailable uponCourt order)

Reorganisation Composition Bankruptcy



Bankruptcy

Not applicable. Not applicable. Rehabilitation Liquidation (free

to enforce after90 days).

JudicialManagement

Scheme ofArrangement (ifthere is nomoratorium orderedby the Court)

Reorganisation Composition Bankruptcy



Bankruptcy

Rehabilitation Plan:– Approval of

secured creditorsrepresenting morethan 75% in value,and approval ofunsecuredcreditorsrepresenting morethan 662/3%in value.



Rehabilitation:– Approval of each

class of creditorsrepresentingmore than 50%in number.

Scheme ofarrangement:– Approval of each



Reorganisation:– Approval of each

class of creditorsrepresenting morethan 50% innumber voting.

– Voting is weightedby the value of debtowed to the creditor.


Composition:– Approval of creditors

representing morethan 50% in numbervoting and 662/3%in value.


Bankruptcy:– Approval of

creditorsrepresenting morethan 50% innumber voting and50% in value.


BusinessRehabilitation:– Approval of each

class of creditorsrepresenting morethan 50% innumber and atleast 75% invalue, or approvalof one class ofcreditorsrepresenting morethan 50% innumber and atleast 75% in valuetogether with atleast 50% in valueof all creditors.

RestorationProcedure:– Approval of

unsecuredcreditorsrepresenting morethan 50% innumber and662/3% in value.




Who controls thecompany and/or itsassets during theinsolvency procedure?

Administration:– Administrator

replacesmanagement.

Liquidation:– Liquidator

replacesmanagement.

Receivership:– Receiver and

manager replacemanagementwhere provided forby debenture.

Rectification:– Court appointed

administratorreplacesmanagement.

– Incumbentmanagement mayapply to the courtto continue tomanage thebusiness under thesupervision of theadministrator.

Compromise:– Incumbent

managementretain control.

Bankruptcy:– Court appointed


Scheme ofarrangement:– Incumbent

managementretain control.


replacesmanagement.

Reorganisation:– Subject to Court

discretion,incumbentmanagementretains control.


replacesmanagement fora voluntarywinding up.

– Official Liquidatorreplacesmanagement fora compulsorywinding up.

Suspension ofdebt payments:– Incumbent

managementretain controljointly withappointedadministrator.

– Supervisoryjudge appointed.

Bankruptcy:– Curator replaces

management– Supervisory

judge appointed.

Civil Rehabilitation:– Incumbent

managementmayretain control.

– Usual practice isfor a supervisorto be appointedto replacemanagement.

CorporateReorganisation:– Two trustees

replacemanagement.


bankruptcytrustee replacesmanagement.

Personal liability fordirectors and officers

Liability for:– insolvent trading;– breach of duty;– fraudulent

behavior.

Liability for:– breach of duty;

– fraud;

– misfeasance;

– insolvent trading.

Liability for:– breach of duty;– fraudulent

trading;– improper

accounting;– failure to assist

with theliquidation.

Liability for:– failure to

co-operate withliquidator;

– fraud oncompany;

– improperaccounting.

Liability for:– breach of duty;– negligent acts

contributingto loss.

Liability for:– breach of

fiduciary duty;– breach of

obligation toact asgood managers.

Receivership/doesenforcement by securedcreditors requirecourt intervention?

Receiver appointed bysecured creditor.

– Not available.– Unless the debtor

is willing tocooperate,enforcement ofsecurity bysecured creditorsrequires courtintervention.

– Receiverappointed bysecured creditor.

– Leave of thecourt required.

– Court generallyappoints theOfficial Liquidatoras the receiver.

– Receiverappointed bycommercialcourt.

– Enforcement ofsecurity bysecuredcreditors can bedone throughpublic auction orthe securedcreditors canask for Courtassistance.

– Not available.– Unless the

debtor is willingto cooperate,enforcement ofsecurity bysecuredcreditorsrequires courtintervention.

Management, personal liability and court involvement on enforcement




Rehabilitation Plan:– Incumbent

managementretain control inthe absence ofany “cause forinsolvency”.


receiver replacesmanagement.

Receivership:– Private receiver

replacesmanagement whereprovided for bydebenture.

– Court appointedreceiver replacesmanagement.

Liquidation:– Liquidator replaces

management.

Rehabilitation:– Incumbent

managementretain controlundersupervision ofrehabilitationreceiver and/orcourt.


replacesmanagement.

Receivership:– Receiver and

manager replacemanagementwhere provided forby debenture.

JudicialManagement:– Judicial manager

replacesmanagement.

Scheme ofArrangement:– Incumbent

management retaincontrol, subject tothe terms of thescheme.


replacesmanagement.

Reorganisation:– Administrator

replacesmanagement(although may beappointed fromincumbentmanagement).

Composition:– Incumbent

management retaincontrol under thesupervision of ajudge and assistantsupervisors.

Bankruptcy:– Trustee replaces

management.

Liquidation:– Liquidator replaces

management.

BusinessRehabilitation:– Plan preparer/Plan


Bankruptcy:– Official receiver

replacesmanagement.

RestorationProcedure:– Asset

Administration andLiquidation Teamreplacemanagement.

Bankruptcy:– Incumbent

managementretain controlunder thesupervision ofthe AssetAdministration andLiquidation Team.

Liquidation:– Asset

Administration andLiquidation Teamreplacemanagement.

Liability for:– willful misconduct

or grossnegligence incontravention ofKorean law or thecompany’s articlesof incorporation.

Liability for:– breach of duty or

misfeasance;– business of the

company which iscarried out with anintent to defraudcreditors or for afraudulent purpose;

– incurring a debtwith no reasonablegrounds ofexpecting that thecompany will beable to repay.

Liability for:– disposals other

than in itsordinary courseof business;

– authorising anytransactiondefraudingcreditors;

– embezzling ormisappropriatingany property ofthe company.

Liability for:– breach of duty;– failure to

co-operate withliquidator;

– fraud oncompany;

– improperaccounting.

Liability for:– failure to

co-operate withthe administrator/trustee;

– fraud on company;– improper

accounting.

Liability for:– breach of duty;– fraud on

company;– improper

accounting.

Receiver appointed bysecured creditoror court.

Enforcement of a fixedstatutory chargeover land requiresapplication to the courtfor intervention.


is willing tocooperate,enforcement ofsecurityby securedcreditors requirescourt intervention.

Receiver appointed bysecured creditoror court.


is willing tocooperate,enforcement ofsecurity by securedcreditors requirescourt intervention.


is willing tocooperate,enforcement ofsecurityby securedcreditors requirescourt intervention.

– Not available.– Enforcement of

security bysecured creditorsrequires courtintervention.




Claw-back periods (theperiod before theinitiation of insolvencyprocedures in whichcertain transactions maybe reversed)

Insolventtransactions:– 6 months to

10 years.

Unfair loans:– no time limit.

Unfair preferences:– 6 months.

Transactions atundervalue:– 1 year.

Payment of debtsnot due:– 1 year.


Extortionate credit:– 3 years.

Avoidance offloating charges:– 1 year.

Dispositions todefraud creditors:– no time limit.

Fraudulentpreferences:– 6 months.

Fraudulenttransactions:– 1 year.

Preferences:– 1 year.

Claw back risks




Unfair preferences:– 60 days to 1 year.

Transactions atundervalue:– 60 days to 1 year.

Fraudulentpreferences:– 6 months.

Transactions atundervalue:– 2 years.

Transactions atundervalue:– no limit specified.

Preferences:– 90 days+.

Unfair preferences:– 6 months to

2 years.

Transactions atundervalue:– 5 years.

Floating charges:– 6 months.

Applicable during aBankruptcy only:

Transactionsdetrimental tocreditors:– 6 months.

Guarantees:– 6 months.

Undue paymentsmade:– 6 months.

Fraudulent transfers:– 1 year.

Preferences:– 3 months.


Transactions atundervalue:– 3 months.



Australia



AustraliaContributed by Clifford Chance (Perth and Sydney offices)

IntroductionThis section provides a general outline of the main corporateinsolvency procedures in Australia. Most of the legislation relevantto insolvency is contained in the Corporations Act 2001 (Cth)(Corporations Act) and is supplemented by the CorporationsRegulations 2001 (Cth).

The main procedures encountered in corporate insolvencies are:

(1) voluntary administration (including deeds of companyarrangement);

(2) receivership; and

(3) liquidation.

We also consider very briefly schemes of arrangement, voidabletransactions, the personal liability of directors, lender liability,guarantees, priority of security and claims, new money lendingand the recognition of foreign insolvency proceedings.

There are also bespoke insolvency regimes for certain othertypes of entities, such as insurance companies (the LifeInsurance Act 1995 (Cth) and Insurance Act 1973 (Cth)) andbanks (the Banking Act 1959 and Payment Systems and NettingAct 1998). These special regimes, together with the personalinsolvency regime, are beyond the scope of this note.

Test of InsolvencyA company is insolvent if, according to the “cash flow test”, it isunable to pay its debts as and when they become due andpayable. This means that a company may be insolvent even if thevalue of its assets exceeds its liabilities (the “balance sheet test”).In practice, the courts assess insolvency through a considerationof the company’s financial position based on commercial reality(having regard to the prevailing circumstances at the time suchas the expectation of future cash inflows) and have heldtemporary lack of liquidity alone is insufficient to conclude that acompany is insolvent.

Voluntary AdministrationIn Australia at present, voluntary administration is the mostcommonly used procedure for formal business rehabilitation.

Voluntary administration involves the appointment of anindependent insolvency practitioner to administer the businesswith a view to maximising the chances of rehabilitating thebusiness either through a compromise implemented through a

Key Elements:n The objective of voluntary administration is to facilitate

business rehabilitation. The procedure provides for anautomatic moratorium on the commencement oflegal proceedings

n Receivership is available as a self help remedy forsecured creditors

n Significant powers given to insolvency officeholders tooverturn voidable transactions

n No restrictions on contract counterparts from exercisingipso facto clauses (clauses in contracts that enable acounterparty to terminate the contract on the insolvencyof the other party)

n Onerous insolvent trading regime: significant risks fordirectors who seek informal restructuring where companymay be insolvent



deed of company arrangement or the sale of some or all of thecompany’s assets.

Although the stated purpose of voluntary administration isbusiness rehabilitation, in practice it is frequently used as the firststep in the liquidation of a company.

Initiating a voluntary administrationA voluntary administration may be initiated at short notice by:

n the directors (by resolution of the board);

n a liquidator (or provisional liquidator) of the company; or

n a secured creditor who is entitled to enforce a securityinterest over the whole, or substantially the whole, of thecompany’s property.

Effect of voluntary administrationThe initiation of a voluntary administration automatically creates amoratorium during which no civil proceedings (includinginsolvency proceedings), may be taken without the consent ofthe administrator or the permission of the court. The moratoriumalso prevents the commencement or implementation of anyenforcement process in relation to the property of the companywithout the permission of the court.

The moratorium is intended to provide the administrator sufficienttime to formulate a rescue proposal for the business, or in theevent that this does not prove possible, an orderly realisation ofthe company’s assets.

There are a number of exceptions to the moratorium. The mainexceptions relate to secured creditors, as noted below:

(a) where a secured creditor with a perfected security interest overthe whole, or substantially the whole, of the company’s propertyenforces its security interest within 13 business days from thedate on which notice is given to the secured creditor of theappointment of the administrator (if the security interest is notenforced during this period, then the secured creditor will besubject to the general moratorium). In practice, it is common forsecured creditors to enter into a deed of forbearance with theadministrator, where the secured creditor agrees not to exercisetheir rights to enforce immediately in exchange for theadministrator agreeing to provide their consent to enforcementby the secured creditor at some later stage;

(b) where a secured creditor takes certain actions to enforce itssecurity interest before the commencement of theadministration or where an owner or lessor of property takescertain actions to recover its property before thecommencement of the administration;

(c) where a secured creditor has a security interest in perishableproperty or where an owner or lessor of perishable propertyseeks to recover its perishable property from the company; and

(d) where a bank has a banker’s lien (possessory securityinterest) over certain property of the company (including cash(in the form of notes or coins), negotiable instruments,securities or derivatives).

In addition to the moratorium, no transfer of shares or alterationin the status of members of the company may take place withoutthe consent of the administrator or with the permission of thecourt. The administrator may only give consent to the transfer ifhe or she is satisfied that the transfer is in the best interests ofthe company’s creditors as a whole.



Importantly, the moratorium does not extend to the exercise ofipso facto clauses (clauses in contracts that enable acounterparty to terminate the contract on the insolvency of theother party) although providers of certain essential services, suchas electricity, gas, water and telecommunications services, areunable to terminate supply.

Powers of the administratorThe powers vested in the administrator are extensive. He or shehas the same powers that the company or any of its officers wouldhave if the company were not under administration, and may do allsuch things as may be necessary for the management of thecompany. When performing his or her function as an administrator,the administrator is acting as an agent of the company.

Upon the appointment of an administrator, the directors’ powers tomanage the company are automatically suspended. However, thedirectors remain under an obligation to continue to assist theadministrator, including by providing information to the administratorabout the company’s affairs. The administrator may dismiss any orall of the directors and may also appoint new directors.

The administrator has the power to dispose of property of thecompany (including property subject to a perfected securityinterest) in the ordinary course of the company’s business, orwith the consent of the secured creditor or permission from thecourt. This includes the ability to deal with any secured propertythat was:

n a “circulating asset” (as defined in the Personal PropertySecurities Act 2009) when the security interest arose; or

n subject to a floating charge,

in the manner the company could deal with the secured propertyimmediately before it stopped being a circulating asset or thefloating charge became a fixed charge.

A secured creditor or owner/lessor may apply to the court for anorder restraining the administrator from disposing of the securedproperty. However, the court may only make the order if it is notsatisfied that arrangements have been made to adequatelyprotect the interests of the secured creditor or owner/lessor, asthe case may be.

Role of creditors in a voluntary administrationCreditors retain a role in voluntary administration: at the meetingof creditors which must be held within eight business days of thecommencement of the administration, the creditors have thepower to:

(a) resolve to appoint a committee of creditors (which will have aconsultative role with the administrator); and

(b) replace the administrator.

A second creditors’ meeting is held within 20 to 25 businessdays of the commencement of the administration, at which timethe creditors will consider the company’s future. This timeperiod is often extended by application to the court (in extremecases, extensions can be for a year or more) for large orcomplex administrations.

Prior to the meeting, the administrator must provide the creditorswith a report about the company’s business, property affairs andfinancial circumstances as well as the administrator’s views on anumber of prescribed questions, including whether it would be inthe creditors’ interests for the company to execute a deed of



company arrangement, end the administration or wind up thecompany. At this meeting, the creditors have the power toresolve that the company will execute a deed of companyarrangement, end the administration or be wound up.

A resolution will carry if approved by a majority in number of thecreditors voting and by a group of creditors owed more than50% of the voting creditors’ total debts. Unlike in a scheme ofarrangement, all creditors vote in the same pool and there are nocreditor classes. If no result is reached, the administrator thenhas the option to make a casting vote for or against theproposed resolution and will conventionally vote consistently withthe decision of the majority in value.

Conclusion of voluntary administrationA voluntary administration may be ended in a number of ways,including where:

(a) the company enters into a deed of company arrangement;

(b) the company’s creditors resolve that the administrationshould end;

(c) the company’s creditors resolve that the company bewound up;

(d) the court orders that the administration is to end; or

(e) the court appoints a provisional liquidator or orders that thecompany be wound up.

Deed of company arrangementA deed of company arrangement is essentially a compromisebetween a company in voluntary administration and its creditors.A company can only enter into a deed of company arrangement

when it is in voluntary administration and when the company’screditors have resolved that it be entered into.

The administrator will prepare the deed of arrangement whichneeds to specify a number of prescribed matters, including theproperty available to pay creditors’ claims, the nature andduration of any moratorium period, to what extent the companyis to be released from its debts, that the entitlements of eligibleemployee creditors will have the same priority that they wouldhave on winding-up (unless explicitly agreed to by a meeting ofthose eligible employee creditors), and the circumstances inwhich the deed terminates. A deed of arrangement can providefor different returns to different types of creditors, provided thedeed is not unfairly prejudicial or discriminatory to one or morecreditors and maximises the chances of the company continuing,or where this is not possible, results in a better return for thecompany’s creditors and members than would result from animmediate winding up of the company.

Once the relevant majority of creditors have resolved for thecompany to enter into the deed of company arrangement, thecompany and the administrator must execute it. Followingexecution, the deed is binding on all the creditors. There is norequirement to have the deed approved or sanctioned by a court.

ReceivershipReceivership is a self help remedy available to creditors who holda security interest in property of the company. The right toappoint a receiver is governed by the terms of the security as amatter of contract between the secured creditor and thecompany. If the appointment is not effected in accordance withthe terms of the security, the receiver will be a trespasser and will



be exposed to liability. Typically, the right of a secured creditor toappoint a receive arises immediately upon a specified default bythe company or upon demand.

In addition, to a private appointment, a receiver can be appointedin special circumstances by a court, on the application of acreditor (such as where its security is unenforceable) or theAustralian Securities and Investments Commission (ASIC) (suchas where the company is under investigation and ASIC seeks tofreeze the activities of the company). The receiver must be aregistered liquidator.

The appointment of a receiver by a secured creditor does notprevent unsecured creditors from pursuing their outstandingclaims against the company. Accordingly, appointment of areceiver is often concurrent with the board’s appointment of avoluntary administrator. As noted above, a secured creditor witha security interest over the whole, or substantially the whole, ofthe property of the company has 13 business days from the dateon which notice is given to the secured creditor of theappointment of the administrator to enforce its security before itbecomes subject to the moratorium that arises on thecommencement of voluntary administration. Such enforcementaction may include the appointment of a receiver by the securedcreditor. In these circumstances, the receiver’s powers will takeprecedence over those of the administrator in respect of thesecured property.

Powers of the receiverA receiver of a company generally has broad powers to do allthings necessary, or as incidental to, the attainment of theobjectives for which the receiver was appointed. A number ofadditional powers are also set out in the Corporations Act,

including the power to: (a) enter into possession and take controlof the company’s property in accordance with the terms of thecourt order or instrument appointing the receiver; (b) convertproperty of the company into money: (c) borrow money on thesecurity of the property of the company; (d) carry on anybusiness of the company; and (e) execute any document, bringor defend any proceedings or do any other act or thing in thename of and on behalf of the company.

The effect of receivership on the company will depend on theterms of the receiver’s appointment. If the receivership is onlywith respect to a single asset, it may be that the directors cancontinue to carry on the business of the company substantiallyunhindered. However, as is more usually the case, where areceiver is appointed over the whole, or substantially the whole,of the property of the company, the directors will effectivelyrelinquish their powers to the receiver.

The receiver’s primary duty is to the secured creditor whoappointed the receiver, although the receiver will usually beappointed as agent of the company. The receiver also has certainstatutory duties to report to ASIC.

In exercising its power of sale, the receiver must take allreasonable care to sell the property for not less than its marketvalue (if it has a market value) or otherwise the best price that isreasonably obtainable, having regard to the circumstances at thetime the property is sold.

Conclusion of receivershipA receivership will ordinarily come to an end when the receiverhas fulfilled the terms of his or her appointment. In the case of aprivately appointed receiver, this is when the receiver has realised



to the extent possible the secured assets for the benefit of thesecured creditor appointing the receiver.

LiquidationThe liquidation of an insolvent company is intended to provide forthe winding-up of the company and the equitable distribution ofthe company’s assets.

There are two forms of liquidation, namely:

(a) winding-up ordered by the court (sometimes calledcompulsory winding-up); and

(b) voluntary winding-up.

Winding-up ordered by the courtA court may order the winding-up of a company in a number ofcircumstances. The two most common are:

(a) the company is insolvent, often established where the companyhas failed to comply with a statutory demand served on it by acreditor with respect to a debt of at least A$2000 within 21days; or

(b) the court is of the opinion that it is just and equitable that thecompany be wound up.

An application for winding-up may be made by the company itself,a creditor (including secured creditors and contingent creditors), amember, a director (only in respect of an insolvent winding-up), aliquidator or provisional liquidator, or certain regulatory bodies.

Upon the court making an order to wind up a company, the courtwill appoint a liquidator. The liquidator must be an official liquidator.

Voluntary winding-upA company may be wound up voluntarily by its membersthrough the passing of a special resolution. A special resolutionof members requires 21 days’ written notice and at least 75% ofthe votes that may be cast at the relevant meeting, although ashorter notice period is permitted if members comprising at least95% of the votes that may be cast at the relevant meeting agreebeforehand. A members’ voluntary winding-up only relates tothe winding-up of solvent companies (which is a condition of amembers’ voluntary winding-up), so is not dealt with in anydetail in this note.

Creditors’ voluntary winding-upIf the company is insolvent and the company’s directors are unableto provide a declaration of solvency, the winding-up must proceedas a creditors’ voluntary winding-up. In these circumstances, afterthe members have appointed a liquidator by ordinary resolution,the liquidator has 11 days from the meeting date to convene ameeting of the company’s creditors. The liquidator must give thecreditors at least seven days’ notice of the meeting and with thatnotice provide a summary of the affairs of the company in theprescribed form. It must also provide information about the knowncreditors, including the estimated amounts of their claims.

Within seven days of the resolution for voluntary winding-up,the directors of the company must give the liquidator astatement, in the prescribed form, about the company’sbusiness, property, affairs and financial circumstances. At themeeting of the company’s creditors, the creditors’ have thepower to replace the liquidator.

In practice, it is common for directors of an insolvent companyto initiate a voluntary administration instead of a creditors’



voluntary winding-up, given the relative efficiencies andprotections available under a voluntary administration.

Provisional liquidationThe court may provisionally appoint an official liquidator at any timeafter the filing of a winding-up application. Whilst the circumstancesin which the appointment of a provisional liquidator may be madehave been described as “infinite” in case law, a provisional liquidatorhave commonly been appointed where the company’s property is injeopardy or because of disputes between directors. A provisionalliquidator derives his powers from the order appointing himalthough it is common practice for a provision liquidator’s powers tobe substantially the same powers as a liquidator.

Effect of liquidationUpon winding-up (whether ordered by the court or initiatedvoluntarily) or the commencement of a provisional liquidation ofa company:

(a) the company must (except on a provisional liquidation) ceaseto carry on its business except so far as is in the opinion ofthe liquidator required for the beneficial disposal orwinding-up of that business;

(b) the liquidator becomes agent of the company and takescustody (but not ownership) of all of the property ofthe company;

(c) the directors’ powers to manage the company aresuspended but the directors must continue to help theliquidator, including by providing information to the liquidatorabout the company’s affairs;

(d) no shares in the company may be transferred (except withleave of the liquidator or leave of the court); and

(e) an automatic moratorium is created during which noproceeding against the company or in relation to property ofthe company or any enforcement process in relation to suchproperty may be brought or progressed except with leave ofthe court. The moratorium does not affect the rights of asecured creditor to realise or otherwise deal with propertysubject to a perfected security interest.

Similar to voluntary administration, the moratorium created oncommencement of liquidation does not extend to the exercise ofipso facto clauses.

Realising the company’s assetsA liquidator’s primary role is to collect in, realise and thendistribute the assets of the company to the creditors.

In recovering the assets of the company, a liquidator has broadpowers to sell or otherwise dispose of the company’s property.Any amounts unpaid on the shares of the company have to bepaid up by the members.

The Corporations Act contains a number of “clawback”provisions, which enable the liquidator to recover further assets incertain circumstances. These provisions are summarised in thesection ‘Voidable Transactions’ below.

Distributing the company’s assetsOnce the liquidator has received, evaluated and determined theproofs of debt submitted by the creditors and realised the assets ofthe company, it must distribute those assets to the creditors.Generally, the secured assets of the company are first distributed tothe secured creditors. The remaining assets, if any, are thendistributed to the unsecured creditors in a prescribed order of



priority. The claims of each relevant class are paid out equally, orpari passu, amongst the creditors in that class. There are numerouscategories of claim, each of which carry a different priority. For thepurposes of illustration, these broadly comprise three groups:

(a) the costs of the liquidation (such as the liquidator’sremuneration and/or the costs of the court application forwinding-up the company);

(b) certain employee entitlements to wages, superannuationcontributions/guarantees and various other payments; and

(c) all other unsecured creditors.

If there are any surplus assets after the unsecured creditors havebeen paid out, these are returned to the members.

Conclusion of liquidationOnce the liquidator has realised all of the property of thecompany (or so much of that property that can, in his or heropinion, be realised without needlessly protracting the winding-up), and has distributed those assets to the creditors and madea final return (if any) to the members, the liquidation can draw toa close and the company can be deregistered.

Schemes of ArrangementA scheme of arrangement is not an insolvency procedure, butrather a compromise or agreement between a company and aclass or classes of creditors or members.

While schemes of arrangement involving the members of acompany may be used in the context of a corporatereorganisation and are often used in connection with takeovers inAustralia, schemes of arrangement involving the creditors of the

company are generally used in the context of insolvency. In thatform they are similar to deeds of company arrangement.However, whilst deeds of company arrangement may be enteredinto without court approval but only when a company is involuntary administration, schemes of arrangement requireapproval by the court but may be entered into at any time andare often used outside of a formal insolvency procedure in theAustralian context.

A scheme of arrangement binds members or creditors within aclass, including unknown creditors who fall within that class. Thepower of the majority to bind the minority in the class operatesregardless of any contractual restrictions (e.g. requirements foramendments and variations set out in the loan documentationgoverning the debt being compromised). Classes are determinedby grouping together persons who have similar legal rightsagainst the company.

For a scheme of arrangement to be approved, a meeting of therelevant class or classes of creditors or members is convenedby the court. This application to convene a meeting may bemade by the company, a creditor, a member or, where thecompany is being wound up, the liquidator. The applicant isrequired to deliver prescribed information to the voting class orclasses prior to the meeting. The relevant class or classes willvote on the proposal, and a proposal is passed where there isa vote in favour by a majority in number, representing debts orclaims against the company in an aggregate amount of at leastthree quarters of the total amount of debt and claims of eachclass voting at the meeting. The court is then required tosanction the scheme, at which point the scheme becomesbinding on the company and the relevant class or classes ofcreditors or members.



Until a scheme of arrangement has been approved by the court,it does not benefit from a moratorium and creditors remain freeto pursue their claims against the company.

Due to the relatively complicated and rigid procedure involved in ascheme of arrangement (including the need for at least two courthearings), the requirement to split creditors into classes and theassociated costs, voluntary administration and deeds of companyarrangements tend to be preferred in the context of insolvency,particularly with respect to small to medium sized companies.

In more recent times, schemes of arrangement have been usedin Australia as a restructuring tool in cases where for instance:

(a) a formal insolvency would result in significant valuedestruction for all stakeholders: for example, as a result ofipso facto clauses becoming operative; or

(b) where secured debt is widely held (such as in the case oflarge secured lending syndicates), and it is not possible tocram down secured creditors into a compromise under thevoluntary administration process as a result of the typicalrestrictions found in finance documents requiring aunanimous vote by the secured creditors for the amendmentto key commercial terms (such as amortisation schedules andmargin) or the release of security.

Voidable TransactionsUnder the “clawback” provisions contained in the CorporationsAct, a liquidator is able to recover property or compensation fromthird parties for the benefit of creditors and to avoid certain debtsowing to third parties, where they relate to certain voidabletransactions entered into by the company in the relevant periodprior to its winding-up. These powers are only available to a

liquidator, and not to a receiver or administrator.

The time periods within which such transactions are vulnerabledepends on the type of transaction in question, ranging from sixmonths in the case of an insolvent transaction to ten years for aninsolvent transaction which has the purpose of defeatingcreditors. Unfair loans are not subject to any time limit. The courthas wide powers to make orders for the recovery of property orthe provision of compensation from third parties where they arefound to be party to a voidable transaction. The length of theclaw-back period is measured backwards in time from the“relation-back day.” Generally speaking this is the date anadministrator was appointed or the date the application to windup the company was filed with the Court.

Insolvent transactionsA transaction is an insolvent transaction where an unfair preferenceis given by the company or an uncommercial transaction is enteredinto by the company, at a time when the company is insolvent orwhere that unfair preference or uncommercial transactioncontributes to the insolvency of the company.

n Unfair preference: In short, a transaction is an unfairpreference given by the company to a creditor if thetransaction results in the creditor receiving from the company,in respect of an unsecured debt, more than the creditorwould receive from the company in respect of the debt if thetransaction were set aside and the creditor were to prove forthe debt in the winding-up of the company.

An insolvent transaction that is an unfair preference isvoidable if the transaction occurred within the six-monthperiod ending on the relation-back day or, for transactions



with related entities, the four-year period ending on therelation-back day, or, for transactions entered into for thepurpose of defeating or interfering with the rights of any or allcreditors, the ten-year period ending on the relation-back day.

n Uncommercial transaction: In short, a transaction is anuncommercial transaction if a reasonable person would nothave entered into it, having regard particularly to the benefitsand detriment arising from the transaction for the company.

An insolvent transaction that is an uncommercial transactionis voidable if the transaction occurred within the two yearperiod ending on the relation-back day or, for transactionswith related entities, the four-year period ending on therelation-back day, or, for transactions entered into for thepurpose of defeating or interfering with the rights of any or allcreditors, the ten-year period ending on the relation-back day.

Recoveries from insolvent transactions resulting from an unfairpreference are more common in Australia than in most otherjurisdictions in the Asia-Pacific region because there is norequirement for the liquidator to show that the creditor that hashad the benefit of the relevant transaction had any intention tobe preferred.

Unfair loans to a company A loan is unfair if the interest or other charges payable by thecompany are, or were at any time, extortionate. In determiningwhat is extortionate, the court will give regard to certain matters,including (a) the risk to the lender, (b) the value of any security,and (c) the amount of the loan. An unfair loan is voidable if it wasmade at any time before the date on which the winding-up of thecompany commenced.

Unreasonable director-related transactions A transaction is an unreasonable director-related transactionwhere the company gives some benefit to a director of thecompany or to an associate of a director (including a payment,a transfer of property or an issue of securities) that areasonable person would not have given, having regardparticularly to the benefits and detriment arising from thetransaction for the company.

Personal Liability of DirectorsA director’s primary duty is to act in the best interests of thecompany. Where the company is in financial distress, directorsare also required to consider the interests of the creditors of thecompany and it is particularly in that context and in any eventualliquidation where a director may be pursued for a breach of his orher duties. There are numerous specific duties which flow fromthis under the general law and as set out in the Corporations Act.

The most relevant is the duty to prevent insolvent trading.Australia’s insolvent trading regime is one of the most onerous inthe world. As a result, many directors often find it difficult toconduct “informal” restructuring when the company’s day-to-daysolvency may be in constant question, given the personal riskthey are taking on, even though that may be in the best interestsof the company. Instead, the Corporations Act provides directorswith the safe haven of voluntary administration as a means ofrescuing the company. Unfortunately, given the lack of restrictionon ipso facto clauses, voluntary administration can often be avalue-destroying process for stakeholders.

Where a director breaches one of his or her duties to thecompany, the director can be liable:



(a) where the company has suffered a loss or damage, tocompensate the company by way of equitable damages orcompensation payable under the Corporations Act;

(b) where the company has incurred a debt when it is insolventor where the company becomes insolvent by incurring thatdebt and at that time there were reasonable grounds forsuspecting that the company was insolvent, or wouldbecome insolvent, to compensate the company or a creditor;

(c) where the director has gained some benefit, to account tothe company for that benefit;

(d) where the director has improperly acquired some property, toreturn that property to the company;

(e) to pay a pecuniary penalty under the Corporations Act of upto AUD200,000;

(f) to disqualification from managing a company; or

(g) to criminal prosecution, where:

(i) the director, in a reckless or intentionally dishonest manner,fails to exercise its powers and discharge its duties;

(ii) the director uses its position, dishonestly and eitherrecklessly to or with the intention of directly or indirectlygaining an advantage for themselves, or someone else, orcausing detriment to the company;

(iii) the director uses information obtained as a director,dishonestly and either recklessly to or with the intention ofdirectly or indirectly gaining an advantage for themselves,or someone else, or causing detriment to the company; or

(iv) the director, in a dishonest manner, breaches its duty toprevent insolvent trading.

Lender LiabilityIn Australia, generally the risk of a lender being held liable to payits customer’s debts is small. The principal risk arises where thelender is found to be acting as a “shadow director” of a companythat becomes insolvent and therefore becomes subject to thesame duties as a director. The concept of “shadow director” canbe found in the definition of “director” in the Corporations Act. Aperson will be a shadow director if “the directors of the companyor body are accustomed to act in accordance with [that] person’sinstructions or wishes”.

GuaranteesA guarantee is a secondary obligation by a third party relating to aprimary obligation by a contracting party (i.e. a borrower under aloan agreement). If the primary obligation is altered, discharged orfails, the guarantee may not be enforceable. Usually the documentcontaining a guarantee will also contain a direct indemnity as anindependent primary obligation. This should survive even if theguarantee is not enforceable. In the majority of Australian states, aguarantee must be in writing to be enforceable.

Guarantees are available in most circumstances, for exampledownstream (parent to subsidiary), upstream (subsidiary to parent)and cross-stream (between sister companies within a group).

Corporate benefit issues need to be addressed especially in thecontext of upstream and cross-stream guarantees.

PriorityThe Personal Property Securities Act (2009) (PPSA), which cameinto effect in January 2012, has substantially reformed how security



is taken over personal property in Australia. The PPSA removes thedistinction between fixed and floating security interests, andestablishes a common registry known as the Personal PropertySecurities Register. In short, the PPSA provides for security intereststo be ranked by method and order of perfection.

Security interests in property not governed by the PPSA (forexample, land) usually rank by order of creation and, whereappropriate, the date of registration on any relevant register.

Broadly speaking, in the context of receivership of assets subjectto a PPSA security interest, claims rank as follows:

n holders of security which rank ahead of the security underwhich the receiver is appointed;

n holders of security (from the proceeds of which the receiverwill recover costs, remuneration and expenses);

n certain employee entitlements to wages, superannuationcontributions/guarantees and various other payments (ranksahead of security over circulating assets);

n unsecured creditors; and

n shareholders.

The priority of payments for a liquidation are summarised in thesection ‘Liquidation – distributing the company’s assets’ above.

New Money LendingNormally lenders will insist on additional security or priority (aheadof debts incurred prior to the proceedings) before any newmonies are advanced to companies after the commencement ofany insolvency proceedings.

Recognition of Foreign InsolvencyProceedingsThe Model Law on Cross Border Insolvency promoted byUNCITRAL was adopted in Australia in 2008 in the form of theCross-Border Insolvency Act 2008 (Cth). This extends theAustralian court’s ability to recognise foreign insolvencyproceedings and to provide assistance to foreign representatives inconnection with foreign insolvency proceedings. The Cross BorderInsolvency Act provides that, where the Model Law applies, thecourt and the liquidator are obliged to cooperate “to the maximumextent possible” with foreign courts and foreign representatives.

In addition to the Model Law, the court can also recogniseforeign insolvency proceeding or provide assistance in corporateinsolvencies pursuant to the Corporations Act, to the extent thatthe relevant proceedings fall outside the scope of the ModelLaw. The Corporations Act provides that the courts mustrecognise insolvency procedures initiated in certain countries(including, the United States, the United Kingdom, Malaysia,Singapore and New Zealand) whilst recognition of insolvencyproceedings initiated outside of these countries remain at thediscretion of the court.





China


ChinaContributed by Clifford Chance (Beijing and Shanghai offices)

IntroductionThis section is designed to provide a general outline of the maincorporate insolvency procedures available in the Peoples Republicof China, excluding Taiwan and the Special Administrative Regionsof Hong Kong and Macau (“China”). Corporate insolvency in Chinais principally governed by the Enterprise Bankruptcy Law of thePeople’s Republic of China which came into force on 1 June 2007(the “Bankruptcy Law”), and is supplemented by various judicialinterpretations issued by the People’s Supreme Court.

The Bankruptcy Law applies to both state-owned and privately heldcompanies, including joint ventures and wholly foreign-ownedentities, as well as, to the extent permitted by applicable law, othernon-corporate entities such as partnerships. Financial institutionssuch as banks, securities companies and insurance companies maybe subject to different rules to be promulgated by the State Council.

The main insolvency procedures available under Chinese law arebankruptcy (pochan), rectification (chongzheng), andcompromise (hejie). Bankruptcy of state-owned enterprisespreviously could also be administered by administrative fiat inaccordance with policies issued by the State Council; however it

has since issued a guideline confirming that this procedure is nolonger permitted. Bankruptcy will lead to the ultimate winding upof a business, whereas rectification and compromise both aim torehabilitate the debtor.

The solvent winding up of Chinese entities, known as liquidation(qingsuan), is not within the remit of the Bankruptcy Law. Awinding up is presumed to be solvent unless a declaration ofbankruptcy is obtained from the court. The procedure to beimplemented will depend on the nature of the entity. Generallyspeaking, the solvent liquidation of a company is governed by theCompany Law of the People’s Republic of China. The ambit of thisnote will not extend to this topic.

Commencement of Insolvency ProceedingsEither the debtor or its creditors may apply to a court to commencebankruptcy or rectification. Only the debtor, on the other hand, mayapply to institute compromise proceedings. Generally speaking,these three proceedings will be available provided that the test forinsolvency as discussed below is met. However, except for the testfor insolvency, the Bankruptcy Law does not set out any detailedtest as to whether the rectification or compromise should beavailable, leaving the court with broad discretion.

Each insolvency procedure commences when the court acceptsthe application, rather than the date of filing. For bankruptcy, thecourt must decide whether to accept the application within15 days of filing; however, a superior court may extend this timeperiod to 30 days. If a creditor files an application, the court isobliged to notify the debtor within five days, after which the debtoris given seven days to object to the application. If the debtor doesobject, the court has 10 days to accept or reject the application.

Key Elements:n Insolvency procedures are court-driven

n Managed by court-appointed administrator

n Automatic moratorium for secured creditors withlimited exceptions

n Upstream guarantees limited to a domestic basis




An applicant may challenge the court’s refusal of an application byappeal. Alternatively, if the court fails to provide a response within15 days, the applicant is entitled to re-file its application directlywith the superior court.

Test for InsolvencyA debtor may apply to commence bankruptcy or compromiseproceedings if it is unable to pay its debts when due, and

(1) its liabilities exceed the value of its assets; or

(2) it clearly lacks the ability to discharge its liabilities.

To institute rectification proceedings, the debtor must establishthat, on the balance of probabilities, it will lose capacity to repay itsdebts. This less onerous requirement is attributed to a desire topreserve viable businesses.

For a creditor to petition for involuntary liquidation or rectificationproceedings, however, it need only establish that the debtor isunable to pay its debts as they fall due.

Protection from CreditorsThe court’s acceptance of an insolvency application gives rise to amoratorium on enforcement proceedings. The debtor is prohibitedfrom disposing of its assets, and creditors are required to file theirclaims with the court-appointed administrator. A secured creditorgenerally remains entitled to enforce its security interest after theacceptance of an insolvency application. In a rectification, however,the secured creditor is prohibited from enforcing its security interestduring the entire rectification period. The court may, nevertheless,allow a creditor to enforce its security interest where the asset isotherwise likely to suffer damage or diminish in value.

AdministrationThe court will appoint an administrator once it accepts theinsolvency application. The role may be filled by a liquidation panel,a professional firm or an individual, although the court will usuallyonly appoint an individual for simple bankruptcy matters. In orderto be chosen, the administrator will be required to meet certainprofessional expertise and practice qualifications.

Role of administratorThe administrator’s role will vary depending upon the insolvencyprocedure. In bankruptcy, it will replace the management inoperating the debtor company, and realise the debtor’s assets forthe benefit of its stakeholders. In rectification, on the other hand,the administrator will either manage the debtor or supervise itsoperations. The administrator should report on its activities to thecourt, and its performance is also supervised by the creditorsthrough the creditors’ meeting and/or creditors’ committee. It mustalso determine, prior to the first creditors’ meeting, whether thedebtor’s business should continue its operations.

Appointment of administratorTo ensure impartiality, the Bankruptcy Law provides that the courthas the sole power to appoint an administrator and determine itsremuneration, although creditors are able to apply for the removalof an administrator should it fail in performing its duties. Theadministrator may only resign with leave of the court, and notwithout good reason.

BankruptcyOnce the court has accepted the application to commencebankruptcy proceedings, the administrator will take on managementof the business and prepare for the company’s liquidation.


Disposal of AssetsThe administrator is to draft plans for the disposal of the debtor’sassets and its distribution of the proceeds, and submit both forapproval at the creditors’ meeting. These plans must also receivethe acceptance of the court. Assets are priced and disposed ofthrough an auction process, except where the creditors’ meetingresolves otherwise or if the assets are subject to transferrestrictions as a matter of law or regulation.

Any creditor who submits a claim to the administrator in abankruptcy proceeding is entitled to attend and vote at thecreditors’ meetings. A secured creditor’s right to vote is limited; forexample, it cannot vote on whether to adopt a compromise orscheme of distribution of the debtor’s assets. As a general rule, aresolution of a creditors’ meeting is passed by reference to amajority of the debtor’s unsecured debt.

Performance of contractsThe administrator may elect to either perform or rescind a contractsubject to partial performance. If the contract is continued, thecounterparty is entitled to ask for security, and a failure by theadministrator to do so is deemed to be a rescission of thecontract. If the administrator fails to respond to the counterpartywithin two months of the court’s acceptance of the bankruptcyapplication, the contract is also deemed as rescinded.

Where an investor has failed to make full payment of capital, theadministrator is entitled to call him/her to do so.

Priority of claimsSecured creditors are paid in priority from the proceeds of theircollateral, and sit outside the general hierarchy for distribution ofassets. An amount exceeding the value of the collateral, however,will rank as an unsecured claim.

Assets are distributed in accordance with the ranking below:

1. “Debts for common benefit”; i.e. expenses incurred inbankruptcy for the good of the estate, such as contractsdue to be performed, and salaries paid to continue thedebtor’s operations.

2. Employment-related claims, such as unpaid employees’wages, pension payments and medical benefits.

3. Social insurance contributions and taxes.

4. Unsecured claims.

Where the proceeds are insufficient to pay out a class in full,distribution is made to the members of that class on a pro ratabasis. Any remaining assets will be used to repay the capitalcontributions of the shareholders.

RectificationCorporate rectification is a procedure intended to rehabilitateviable businesses that require temporary protection fromcreditors. It is a three-stage process.

Stage 1: ApplicationThe debtor or a creditor applies to the court to bringproceedings for rectification. Any shareholder holding an equityshare in the debtor equal to or greater than 10% is also entitledto file an application.

Stage 2: RectificationThe administrator generally assumes management of thecompany, although the debtor may apply to the court for the rightto continue to manage its business under the administrator’ssupervision. There is no clear guideline as to when such an



application will be accepted, but it is usually the exception ratherthan the rule.

Within six months of commencing the rectification period, theadministrator (or debtor) must prepare a plan aimed at improvingthe debtor’s financial situation and business performance. Forexample, the administrator must draft a scheme for therepayment of creditors and restructuring of debt. Once this hasbeen submitted, the court will convene a creditors’ meeting tovote on the plan.

Stage 3: ImplementationSimilar to the voting procedure used in other jurisdictions, creditorswill be divided into different classes; e.g. secured creditors,unsecured creditors, and employment-related creditors. Theapproval of each class must be obtained, which is determined bythe affirmative vote of a majority of creditors in the class that arepresent and voting, and who must comprise at least two-thirds ofthe value of the debt held in that class.

If the rectification plan is approved by the creditors, a furtherapplication must be made to the court to obtain its sanction beforethe plan can be implemented. If the creditors reject the plan, thedebtor and/or administrator may nevertheless apply to the courtfor approval provided certain conditions are met.

CompromiseA debtor may apply for a court order to initiate a compromiseprocedure, whereby the debtor is given the opportunity to proposea settlement of debts with its creditors. The debtor will draft asettlement agreement that is later submitted to the creditors’meeting. The creditors may accept the agreement by a simple

majority, which equates to no less than two-thirds of the value ofthe unsecured debt. It must also receive the approval of the court.If the creditors’ meeting fails to accept the agreement, the courtwill declare the debtor bankrupt.

There is no time limit within which a creditors’ meeting must beheld for compromise proceedings. Debtors sometimes will attemptto stall proceedings by making tactical applications for rectificationor compromise.

The moratorium for secured creditors is lifted once an orderpermitting a compromise is issued. It thus appears that acompromise is a viable option for small to medium-sized debtorswho have mainly unsecured debt.

Set-offIf a creditor incurs a debt to the debtor prior to the court’sacceptance of the bankruptcy, the creditor may propose a set-offto the administrator, except in the following circumstances:

n the creditor’s right was acquired from a third-party creditor ofthe debtor after the court accepted the bankruptcy application;

n the creditor was aware of the debtor’s actual or potentialinsolvency, unless the liabilities were incurred by operation oflaw or for reasons that occurred one year or more before thebankruptcy application was made; or

n a debtor of the debtor acquired creditor rights when aware ofthe debtor’s actual or potential insolvency, save where thecreditor rights were obtained by operation of law or for reasonsthat occurred one year or more before the bankruptcyapplication was made.



Challenges to Antecedent TransactionsThe Bankruptcy Law sets out certain circumstances that render atransaction entered into by the company before bankruptcy aseither voidable, at the application of the administrator to the court,or void. This aims to prevent the bankrupt company from actingbeyond its ordinary course of business to diminish the value of itsassets available to unsecured creditors. It also ensures that nounjustified preference is given to certain unsecured creditors at theexpense of others.

Voidable TransactionsThe following acts are voidable, provided they take placewithin the year prior to the date the court accepts thebankruptcy application:

n the sale or transfer of assets at no value or at anunreasonable value;

n the provision of security for an unsecured debt;

n the early payment of debts which are not due; and

n a waiver of a creditor’s rights.

Where, in the six months prior to the date the court accepts thebankruptcy application, a debtor has made preferential payment tocreditors whilst insolvent, the administrator may also apply to thecourt to declare such payments invalid.

Void TransactionsThe following acts are deemed to be void:

n concealment or diversion of the bankrupt company’s assets toavoid liabilities; and

n acknowledgment of “untrue debts” or the fabrication of liabilities.

An administrator is entitled to recover these lost assets.Furthermore, if such acts harm the “interests of creditors”, the legalrepresentative of the debtor and other responsible personnel maybe called upon to indemnify the resulting losses.

Director LiabilityCivil liability may be incurred by a director, a member of thesupervisory board, or a senior manager for the debts of a bankruptcompany in a limited number of circumstances. For this purpose,the “supervisory board” refers to the component of China’s two-tiercorporate governance structure responsible for supervisingdecisions of the board of directors.

Under Chinese law, directors are obliged to act in good faithand diligence. If either of these duties are breached, and as aresult the company is placed into bankruptcy, the director mayincur civil liability. The director may also be prohibited fromassuming the position of director or senior management in anycompany for a period of three years from the date of theconclusion of the bankruptcy.

Any administrator that acts to harm the interests of a creditor mayalso be liable for compensation. Please see Challenges toAntecedent Transactions for further information.

The legal representative and, if required by the court, the financialmanagement personnel and other operational managementpersonnel of the debtor must render their cooperation to the courtand the creditors’ meeting during insolvency. For the duration ofthe bankruptcy proceedings, the court may detain or fine thedebtor’s staff and management if they leave their place of domicile.



Lender LiabilityThe risk in China of lenders being held liable to pay theircustomers’ debts is rather remote. Whilst the principal risk for alender under certain common law jurisdictions (such as Englandand Wales) arises where the lender is found to be acting as ashadow director of a company that becomes insolvent, the terms“shadow director” or “shadow manager” are not legal conceptsunder Chinese law. Generally speaking, Chinese law does notimpute liability to a lender, as a shadow director or otherwise,where the lender takes actions to protect its interests in acompany that is in financial difficulty.

GuaranteesGuarantees are available for downstream (i.e. parent to subsidiary)and cross-stream (i.e. between sister companies within a group)transactions, both on a domestic and cross-border basis. If theguarantee is granted (i) in favour of an overseas lender; or (ii) infavour of a domestic lender but the borrower (debtor) is anoverseas institution, it will generally require the approval of the StateAdministration of Foreign Exchange (“SAFE”). Upstream guarantees(i.e. subsidiary to parent) are limited to domestic purposes.

Where the guarantee is given in favour of an overseas lender, theborrower must:

(a) be directly or indirectly held by the Chinese guarantor (being anon-financial institution);

(b) have a positive net asset value; and

(c) have generated a profit for the past three years (for long-termprojects, e.g. resource development companies, this timeperiod is five years).

In addition, SAFE requires that (a) the ratio of net assets to totalassets of the guarantor (being a non-financial institution) shall, inprinciple, not be less than 15% and (b) the amount of the debtguaranteed by the guarantor shall not be more than 50% of itsnet assets.

There are no express requirements for corporate benefit underChinese law. The company must comply, however, with theprovisions set out in its articles of association. These can include:

n guarantee limits, and

n requirements to obtain board or shareholder approval.

If a company provides a guarantee for the debts of a shareholderor the actual controlling party of the company, that guarantee mustbe approved by a shareholders’ resolution. This vote shall notinclude the guaranteed shareholder or the shareholder controlledby the guaranteed actual controlling party.

To be effective under Chinese law, a guarantee must be made inwriting. The agreement should also specify whether it is a generalguarantee, in which the guarantor only assumes liability afterdistribution of the bankrupt entity’s assets, or a guarantee with jointand several liability, where the creditor can seek direct redressagainst the guarantor. If this is not clearly specified, the court willconstrue the guarantee as joint and several.

For an obligation secured by both a guarantee and other forms ofsecurity, the guarantor is only liable for the unsecured portion.

Government authorities and institutions set up for public welfare,such as schools and hospitals, are legally incapable of grantinga guarantee.



New Money LendingNormally lenders may only advance new monies to debtors subjectto bankruptcy proceedings after the court has approved therectification petition or a settlement between the debtor and itscreditors. In the context of restructuring, an administrator or debtormay enter into a secured loan for the purpose of continuingbusiness operations. In the context of settlement, lenders need tocarefully assess the company’s ability to perform the settlementagreement (so that the bankruptcy proceedings would not beresumed due to its default) and the impact of the settlement on thecompany’s ability to repay any new loan (e.g. whether anysubstantial amount of debt has been exempted or extended, and ifso, on what conditions).

Cross-border InsolvencyThe Bankruptcy Law extends the effect of Chinese bankruptcyprocedures to debtor’s assets located overseas, although thisrelies on the cooperation of foreign courts. Foreign bankruptcyproceedings may also be binding in China with respect to theChina-based assets of a debtor.

Foreign proceedings are binding where:

(a) there is a treaty for reciprocity, or reciprocity in practice, in therecognition of insolvency proceedings;

(b) the foreign insolvency proceedings do not contravene thebasic principles of Chinese law and Chinese sovereignty,security and public interest; and

(c) the foreign bankruptcy proceedings do not impair the legalinterests of a Chinese creditor.

There are presently around 40 treaties for reciprocal enforcementof judgments between China and other jurisdictions, none of whichspecifically refer to bankruptcy proceedings and few, if any, involveChina’s major trading partners. Similar requirements apply to theenforcement of foreign judgments in China. Concepts such as“public interest” and “impair” have been used to refuse recognitionof otherwise meritorious cases.



34 A guide to Asia Pacific restructuring and insolvency procedures34

Hong Kong SAR


Hong Kong SARContributed by Clifford Chance (Hong Kong office)

IntroductionThis section provides a general outline of the main corporateinsolvency procedures in Hong Kong. Hong Kong insolvency lawis governed primarily by the Companies Ordinance, theBankruptcy Ordinance and the Companies (Winding-up) Rules. Itis based on the laws of England and Wales and tends to becreditor-friendly.

There is no statutory procedure in Hong Kong for the rehabilitationof companies comparable to administration in England or Chapter11 in the US. Therefore the majority of companies in financialdifficulties will either enter an informal restructuring process (withthe aim of restructuring the company’s debts in order to continueoperating) or go into liquidation. The primary purpose ofliquidation is to realise the assets of the company and distributethe proceeds to the company’s creditors and, in the event thatthere is a surplus, to the company’s shareholders. Liquidation isdiscussed further below.

We also briefly consider receivership, schemes of arrangement,challenges to antecedent transactions, the personal liability ofdirectors, lender liability, guarantees, priority of security andclaims, new money lending and the recognition of foreigninsolvency proceedings.

The insolvency of authorised institutions, which includes HongKong banks, is addressed by the Banking Ordinance. Insummary, the Banking Ordinance provides that the provisions ofthe Companies Ordinance relating to a creditor’s voluntarywinding up do not apply to authorised institutions and provides aspecial process for the presentation of a petition for the windingup of an authorised institution.

There are also bespoke insolvency regimes for certain othertypes of companies, such as insurance companies. Thesespecial regimes are beyond the scope of this note.

LiquidationThere are two types of liquidation:

(1) winding up by the court (also called “compulsory windingup”); and

(2) voluntary winding up.

There are two types of voluntary winding up, both of which donot involve the court:

(a) members’ voluntary winding up – this is not an insolvencyprocess, as in order for the company to qualify for amembers’ voluntary winding up its directors must file adeclaration of solvency with the Companies Registry certifyingthat the company will be able to pay its debts in full; and

Key Elements:n No statutory procedure for the rehabilitation of companies

n No statutory moratorium preventing the enforcementof security

n Receivership available as a self help remedy forsecured creditors

n Anti-avoidance mechanisms available to liquidators in orderto maximize recoveries for creditors

n Scheme of arrangement available to compromise claims ofcreditors and contributories



(b) creditors’ voluntary winding up – this is normally initiated bythe shareholders or directors of an insolvent company.Typically, once the directors have concluded that thecompany is insolvent and there is no real prospect of arestructuring, the directors will convene a meeting ofmembers to pass a special resolution to wind up thecompany and choose the liquidator.

Section 228A of the Companies Ordinance allows thedirectors, without first consulting the shareholders, tocommence a voluntary winding up of the company andappoint a provisional liquidator. This procedure is rarely usedbecause it is only available where winding up under anotherroute is not reasonably practical, and the directors arerequired to give detailed reasons as to why this is the case.

Winding up by the court is normally initiated by a creditor(secured or unsecured) but is also available to the company itselfwhere the shareholders of the company have passed a resolutionfor winding up. The liquidator is typically an accountancyprofessional, and the liquidation process takes place under thesupervision of both the court and (to a much lesser extent) theGovernment (through the Official Receiver).

Compulsory Winding UpGrounds for a winding up orderMost applications for a company to be wound up by the courtare made by unsecured creditors and usually on the grounds thatthe company is unable to pay its debts. A company is deemedunable to pay its debts where:

(a) the company fails to satisfy within three weeks of the serviceof notice a debt exceeding HKD10,000; or

(b) the enforcement of a judgment of the court against thecompany has not been satisfied in full; or

(c) it appears to the court that the company is unable to pay itsdebts, taking into account the contingent and prospectiveliabilities of the company. The usual test relied upon is the cashflow test but the balance sheet test can also be relied on.

Other grounds for compulsory winding up are available, the mostcommon of which is that the court is of the opinion that it is justand equitable that the company should be wound up. This ‘justand equitable’ ground has been held to include that the companywas formed to carry on an illegal or fraudulent purpose or thatthe main purpose of the company has gone.

Impact of presentation of winding up petitionAt any time after the making of the winding up application andbefore the making of a winding up order, the court may (ifrequested by the company or any creditor) stay any legalproceedings against the company on such terms as it thinks fit.

Where a winding up order has been made, or a provisionalliquidator has been appointed, there is an automatic stay of legalproceedings and no legal proceeding can be proceeded with orcommenced against a company except with the leave of thecourt, and subject to such terms as the court may impose.Court-based enforcement proceedings against a company or itsassets, such as attachment and execution, become void on thecommencement of a winding up. The commencement date is(retrospectively) the date on which the winding up petition ispresented (in a winding up by the court) or the date on which theresolution is passed (in a voluntary winding up).



A winding up (whether compulsory or voluntary) has no formaleffect on the process of security enforcement (subject to thepossibility of an antecedent challenge, as summarised below). Inrespect of contracts to which the company is a party, it isgenerally the case for both compulsory and voluntary winding upthat the contracts will continue, subject to the liquidator’s powersto disclaim onerous contracts (discussed below). Employmentcontracts are an exception to the rule: employees engaged underservice contracts are automatically dismissed from the date ofpublication of the winding up order, although the liquidator maypermit the employment of some or all of the company’semployees to continue, usually on a short-term basis, if theliquidator intends to carry on the business of the company. Thewinding up order also has the effect of terminating the directors’powers of management and control over the company.

Provisional liquidation (before the winding up order)Following the presentation of a petition for winding up, the courtmay make an order for the appointment of a provisional liquidator(or, usually, for two provisional liquidators who act jointly andseverally). The usual reason for the appointment of a provisionalliquidator is to preserve the assets and records of a company forthe benefit of the creditors during the period following thepresentation of the winding up petition and before the granting ofthe winding up order (usually this is a period of about twomonths). The most common ground for seeking the appointmentof a provisional liquidator is that there is a perception that theassets and affairs of the company are in jeopardy, primarilybecause the directors and/or shareholders may dissipate theassets while the petition for winding up is pending.

A provisional liquidator has no statutory or implied powers, andtherefore his powers need to be set out in full in the court order

appointing him. The court may vest a range of powers in theprovisional liquidator for managing the affairs of the company andcontinuing the business in the ordinary course. On occasions, theprovisional liquidator is given all the powers of a liquidator.

On and following the appointment of a provisional liquidator thecompany continues to exist and the identity and character of thecompany is not altered but the appointment has the effect ofdisplacing the directors’ powers of management. The provisionalliquidator assumes control of the company and takes into hiscustody or control all the property and things in action to which thecompany is or appears to be entitled. The appointment of aprovisional liquidator has the effect of automatically revoking theauthority of any agent of the company who was appointed by or onbehalf of the company. The entry into provisional liquidation doesnot of itself lead to the termination of the contracts of the company.

The provisional liquidator is an officer of the court and so doesnot represent any creditor or class of creditors. On theappointment of a provisional liquidator, all legal proceedingsagainst the company are stayed.

Choice of liquidatorThe Official Receiver becomes the provisional liquidator when awinding up order is made, unless a provisional liquidator has alreadybeen appointed in which case the provisional liquidator will continueto act as such until another person becomes the liquidator.

With the exception of cases which qualify for the summaryliquidation procedure (discussed briefly below), the provisionalliquidator is required to call separate meetings of the creditors andcontributories to decide upon an application to be made to thecourt for the appointment of a liquidator. Creditors have the



opportunity during these meetings to put forward the name oftheir preferred candidate to be appointed as liquidator. If nonomination has been received by the Official Receiver for theappointment of a liquidator, then, by the operation of the rostersystem of the Administrative Panel of Insolvency Practitioners forCourt Windings Up (a ‘cab-rank’ system), the name of the nextperson on the roster will be put to creditors at the meeting. If thecreditors and contributories do not agree on the choice of theliquidator, then the court may make such order as it thinks fit. Thecourt will act in the interests of all the parties and is not in any waybound by the recommendations of the creditors or contributories.

As is the case for provisional liquidators, the usual practice is toappoint two liquidators who act jointly and severally.

Where the court is satisfied that the assets of the company areunlikely to exceed HKD200,000, the court may order that thecompany is to be wound up in a summary manner. One of themain effects of such an order is that the Official Receiver or theprovisional liquidator shall be the liquidator, without there beingany meetings of creditors or contributories.

Liquidator’s ability to disclaim contracts The liquidator of a company may, with the leave of the court,disclaim onerous property (including shares or stock incompanies and unprofitable contracts) of the company beingwound up, at any time within 12 months after thecommencement of winding up (or such longer period as may beallowed by the court), though the court in Hong Kong hasdisplayed a reluctance to sanction a disclaimer of property incases where the rights of third parties may be adverselyaffected. Accrued rights and obligations will not be affected byany such disclaimer.

Distributing the company’s assetsAs a general principle, creditors’ claims in a winding up will rankin the following order:

(a) particular expenses (receivers’ or liquidators’ expenses andother expenses in relation to the insolvency);

(b) creditors preferred by statute (e.g. tax and remunerationof employees);

(c) unsecured creditors; and

(d) shareholders, according to their rights and interests inthe company.

Distribution among each class is pari passu by reference to thevalue of claims as accepted by the liquidator. Pari passudistribution is mandatory and is one of the fundamental principlesof Hong Kong corporate insolvency law.

The distribution of the proceeds of the enforcement of securitygenerally falls outside the winding up: these proceeds are used tosatisfy the debts of the creditors who had the benefit of the relevantsecurity interest, with any excess proceeds then distributed inaccordance with the order set out above. The exception to this is inrelation to security created by way of a floating charge, wherepreferential debts must be paid before the charge holder is paid.

Secured creditors may enforce rightsIn the ordinary course of events, a secured creditor is entitled torely on the terms of a properly drafted security document toenforce its security. In a compulsory or voluntary liquidation ofthe company, the secured creditor remains entitled to enforce itssecurity rights, either by itself, or through the appointment ofa receiver.



Any creditor (secured or unsecured) may apply to the court toput a company into compulsory winding up, although unsecuredcreditors normally initiate this process. Creditors cannot initiate avoluntary winding up.

In practice, a secured creditor will normally recover its debt byenforcing its security and will claim in the liquidation only inrelation to the unsecured balance of the debt (if any).

Admissibility of debtsIn a winding up, debts of all descriptions are properly provable bya creditor, which include liquidated and unliquidated claims,certain and contingent debts, existing and future debtsascertained, any obligation to pay damages, periodic paymentsand claims for interest.

Interest on a debt is provable as part of the debt, except in so faras it is payable in respect of any period after the commencementof the winding up. The amount of any admissible debt (andinterest) is calculated as at the date of the commencement of thewinding up, i.e. the date of the filing of the petition in acompulsory winding up and the date of the passing of theresolution in a creditors’ voluntary winding up.

Mandatory set-off also applies. Only mutual credits, mutual debtsor other mutual dealings between the company and the creditor,determined as at the date of the commencement of the windingup (for this purpose, in a compulsory winding up thecommencement of the winding up is taken as the date of thewinding up order), can be set-off against each other.

Creditors of a company may contractually agree (for example byan intercreditor agreement) how their claims should be ranked

prior to and on the winding up of the company. Intercreditoragreements are not unusual. The extent to which an intercreditoragreement will be enforceable in insolvency is unclear.

ReceivershipA secured creditor can exercise its rights under a securitydocument to appoint a receiver over the assets of the companycovered by the security. A security document usually provides thata secured creditor may appoint a receiver upon the occurrence ofone or more specified events of default. In addition, a receiver canbe appointed by the court (although this is rare in practice).

The receiver’s primary duty is to manage and realise assets, inorder to remit the proceeds to the secured creditor whichappointed him. The scope of the receiver’s powers will be set outin the security document and the document appointing him, or inthe court order. A receiver also has common law duties andspecific duties set out in the Companies Ordinance.

There is no legal reason why the company should be wound upafter the secured creditor has been paid, but in practice veryoften a company is wound up after the appointment of a receiver.

Schemes of ArrangementThis is not an insolvency procedure, but a mechanism containedin section 166 of the Companies Ordinance which allows thecourt to sanction a compromise or arrangement that has beenagreed between a prescribed majority of the relevant class orclasses of creditors or members and the company.

A scheme of arrangement binds all creditors or members within aclass, including unknown creditors who fall within that class. The



power of the majority to bind a minority in the class operatesregardless of any contractual restrictions (e.g. requirements foramendments and variations set out in the loan document whichgoverned the debt being compromised). A scheme ofarrangement is typically proposed by the company as a means ofavoiding liquidation.

There is no process under Hong Kong law to put in place amoratorium to prevent secured creditors from realising theirsecurity or unsecured creditors from bringing or continuing legalproceedings against the company whilst a scheme ofarrangement (or an informal restructuring) is attempted. However,under Hong Kong law the appointment to a company ofprovisional liquidators (pursuant to the presentation of a petitionto wind up the company, and pending the making of the windingup order) has the effect of staying all legal proceedings (includingattachment proceedings) against the company (but does notprevent secured creditors from realising their security). The HighCourt in Hong Kong has in recent years granted provisionalliquidators powers to formulate restructuring plans, therebyproviding a moratorium on legal proceedings during which ascheme of arrangement can be developed.

In order to initiate a scheme of arrangement effecting acompromise of creditors’ claims, an application is filed with thecourt. Once the court’s agreement to the convening of meetingsof creditors (or classes of creditors) has been obtained, anexplanatory statement and notices convening such meeting(s) arethen sent to all known creditors.

At the meeting of creditors (or of a class of creditors), a majority innumber and three-quarters in value of the creditors (or the classesof creditors) who are present and voting either in person or by

proxy must accept the proposal in order for it to be binding on allthe creditors (or all the creditors of the class, as the case may be).

Following the creditors’ meeting(s), the scheme must besanctioned by the High Court: this requires a formal hearing in fullcourt. The scheme takes effect upon filing with the registrar ofcompanies the court order sanctioning the scheme.

If creditors’ claims have been addressed in a scheme ofarrangement, and if the scheme of arrangement is approved,there is an effective ‘cram-down’ of creditors’ claims (even if arelevant creditor voted against the scheme). Any creditors whoseclaims have not been addressed in the scheme retain their fulloriginal rights against the company after the scheme has beenput in place. Putting in place a straightforward scheme ofarrangement is likely to take four months, with more complexschemes taking more than six months to put in place.

If a scheme of arrangement is proposed and is not approved, oris approved and put in place but not successfully implemented,the winding up of the company is very likely to follow.

Informal WorkoutFinancial institutions are often at the forefront of restructuringproposals, and banks tend to adhere to a set of informalguidelines jointly issued by the Hong Kong Association of Banksand the Hong Kong Monetary Authority. As the guidelines applyonly to banks, difficulties can arise when an informal workoutinvolves other types of creditors. This informal corporate rescueprocess is effected by contract between the company and(usually) its lender creditors, leaving other creditors (usually tradecreditors) free to pursue other remedies as they see fit.



Challenges to Antecedent TransactionsSecurity granted by a company, and transactions entered into bya company, are subject to the risk of the security being invalid, orthe transaction being voided, if it is granted, or entered into,during the applicable risk period (known as the “hardeningperiod”) before the making of an application for that company’swinding up. The length of the risk period varies, depending onthe type of challenge and the circumstances in existence at thetime the security was created.

Preferences: section 50 Bankruptcy Ordinance, as appliedby 266 and 266B Companies Ordinance, to companiesbeing wound upAn unfair preference is an act (e.g. granting of security orguarantee) which has the effect of putting a creditor, a surety or aguarantor in a better position than it would otherwise have beenin upon a winding up of the company. The general risk period issix months, but is increased to two years if the unfair preferenceis granted to an “associate”, for example, a company in whichthe company in winding up holds one-third or more of the votescapable of being cast at a general meeting. The legislation is notentirely clear, but the general view is that, in order for the relevanttransaction to be invalidated as an unfair preference, thecompany must have been insolvent at the relevant time and musthave been influenced in deciding to give the preference by adesire to produce the effect of putting the relevant creditor, suretyor guarantor in a better position.

Extortionate credit transactions: section 264BCompanies OrdinanceA credit transaction is extortionate if (taking into consideration thecredit risks) credit is provided for grossly exorbitant payments

(either actual or contingent e.g. on default) or the transactiongrossly contravenes principles of fair dealing. The risk period isthree years.

Avoidance of floating charges: section 267Companies Ordinance A floating charge granted in the 12 months prior to the windingup will be invalid except (i) where it can be proved that thecompany was solvent immediately after creation of the floatingcharge or (ii) to the extent of cash received by the company forgranting the floating charge and interest on it.

Fraudulent conveyances: section 60 Conveyancing andProperty OrdinanceAlthough rarely invoked, this section provides for the voidability ofdispositions made with the intent to defraud creditors. There isno time limit, and the section applies whether or not thecompany making the disposition is being wound up or insolvent.

Transactions at an undervalueHong Kong does not have this concept in the context of corporateinsolvency. Transactions having this effect are likely to fall within themisfeasance provisions in the Companies Ordinance, which enablerecovery to be sought from the director or officer of the company,but do not enable the transaction to be avoided.

Personal Liability of DirectorsDirectors can incur civil and criminal liability for the debts of aninsolvent company in a number of ways. Persons liable underthese provisions often include not only existing and pastdirectors, but also existing and past officers (which includesmanagers and company secretaries), promoters of the company



and any liquidator or receiver of the company, as well as personsoccupying the position of director by whatever name called. Thescope of persons potentially subject to liability therefore needs tobe looked at carefully on a case by case basis.

The principal areas of risk for directors are breach of duty andfraudulent trading. Hong Kong does not currently have astatutory insolvent trading regime (for example, similar to that inEngland or Australia).

Breach of dutyCivil law actions can be taken by the company against a directoron the basis of a breach of directors’ duties to the company. Inparticular where a company is insolvent or near insolvency,directors have a duty to the company to take into account theinterests of the general body of creditors. There is often anoverlap between breach of directors’ duties and statutoryprovisions: a breach of duty to creditors might also amount tofraudulent trading (discussed below). Equitable remedies areavailable, and a liquidator can also take action under the statutoryprovision for misfeasance, which provides for a summaryprocedure for the enforcement of existing rights that the companyhas against directors. Under the misfeasance provisions, the courtcan order directors to compensate the company for its losses.

Other directors’ duties which might be relevant on a winding upinclude exercising powers for improper purposes, misapplicationof corporate property, breach of restrictions on maintenance ofcapital and breach of the duty to act with care, skill and diligence.

Fraudulent trading: section 275 Companies Ordinance This section enables the liquidator, the Official Receiver and anycreditor or contributory of a company to apply for contributions

from any persons (i.e. not only directors and shadow directors)who were knowingly parties to the carrying on of business withintent to defraud creditors. The section requires a finding ofdishonesty, and applies whether or not the company is woundup. The court may declare that any such persons are personallyliable for all or any of the debts or other liabilities of the company.In addition, where the company is wound up, such persons areguilty of an offence and are liable to imprisonment and a fine.

Criminal liability In addition to fraudulent trading, the breach of certain otherprovisions of the Companies Ordinance may also result incriminal liability. These include defrauding creditors (whichoverlaps to a certain extent with the provisions on fraudulenttrading), failure to keep proper accounts, falsification of books,and failure to assist with the liquidation.

Disqualification of directorsHong Kong also has provisions for the disqualification of directors,similar to those in England and Wales. Grounds for disqualificationinclude conviction for certain indictable offences, breaches ofcertain provisions of the Companies Ordinance, fraudulent tradingor other fraudulent conduct in winding up, and conduct renderingsuch person unfit to be a director of a company.

Lender LiabilityGenerally speaking, the risk in Hong Kong of lenders being heldliable to pay their customers’ debts is small. In theory, theprincipal risk for a lender arises where it is found to be acting asa shadow director of a company that is wound up.

The expression “Shadow Director” is defined in section 168C ofthe Companies Ordinance as “...a person in accordance with



whose directions or instructions the directors or a majority of thedirectors of the company are accustomed to act”.

In other common law jurisdictions, generally the greatest risk tolenders who are found to be shadow directors comes from theapplication of an insolvent trading regime, which Hong Kongdoes not have. It is conceivable that a lender which was found tobe a shadow director might be liable under the fraudulent tradingregime or for another of the offences referred to above, but wehave not seen this in practice.

GuaranteesGuarantees are available in most circumstances, for exampledownstream (parent in respect of the obligations of itssubsidiary), upstream (subsidiary in respect of the obligations ofits parent) and cross-stream (a company in respect of theobligations of its sister company). However, the rules on financialassistance provide that where a person has acquired, is acquiringor is proposing to acquire shares in a company, it is not lawful forthe company or any of its subsidiaries to give financial assistance(which includes the granting of a guarantee) directly or indirectlyfor the purpose of that acquisition. Exceptions to this prohibitionapply where the company acquired is not listed and certainconditions (including as to the financial condition of the companygiving the financial assistance) are satisfied.

Corporate benefit issues will also need to be addressed especiallyin the context of upstream and cross-stream guarantees.

A guarantee is a secondary obligation by a third party relating toa primary obligation by a contracting party (i.e. a borrower undera loan agreement). If the primary obligation is altered, dischargedor fails, the guarantee may not be enforceable. Usually the

document containing a guarantee will also contain a directindemnity as an independent primary obligation. This shouldsurvive even if the guarantee is not enforceable.

Strictly, a guarantee need not be in writing to be enforceable, but inpractice gaurantees in business transactions are always in writing.

Priority of Security InterestsSecurity is generally available over all types of assets in HongKong. If a company is giving security over as many of its assetsas possible, there will usually be one security document called adebenture which will include a number of fixed charges and afloating charge (a charge over a changing pool of assets).

It is possible for the court to re-classify a fixed charge as a floatingcharge if there are, for example, inadequate restrictions on whatthe company can do with the asset or the proceeds of the assetsubject to the charge. This may affect the priority of the security,as a floating charge will normally rank behind all fixed security.

Security usually ranks by chronological order of creation, but topreserve the priority position, notice may need to be given. Forsome assets, registration is required in an asset or documentregister (e.g. land and buildings) and security will rank by the dateof registration. Legal security will usually have priority overequitable security provided that it is properly created, eventhough it may be created after equitable security is created.

Most types of security given by a company must be registered withthe Companies Registry in Hong Kong within five weeks of the dateof creation of the security: if they are not so registered, they will bevoid against any liquidator of the company. Registration is requiredwhere security is granted by a company incorporated in Hong Kong



or by a company incorporated outside Hong Kong (and registeredas a non-Hong Kong company under Part XI of the CompaniesOrdinance) and creating security over assets in Hong Kong. Thirdparties who could reasonably be expected to make a search withthe Companies Registry may be treated as having notice of securityregistered at the Companies Registry.

Particular rules apply to security taken by mortgage and rankingof further advances secured by a mortgage against subsequentmortgages.

New Money LendingWhere lenders have agreed to advance new monies to acompany which has entered into winding up proceedings, theywill usually insist on being provided with additional security orpriority (ahead of debts incurred prior to the proceedings),thereby giving the new monies a ‘super priority’ should thecompany go on to be wound up.

Recognition of Foreign InsolvencyProceedingsThe Companies Ordinance confers jurisdiction on the Hong Kongcourts to wind-up companies incorporated outside Hong Kong.However, the court will exercise the power to wind up a foreigncompany only where it can be demonstrated that:

(a) the foreign company has a sufficient connection, or nexus,with Hong Kong to support the court exercising its discretionto make a winding up order;

(b) there is a reasonable possibility, if a winding up order is made,of benefit to those applying for the winding up order; and

(c) one or more persons interested in the distribution of assetsof the company are persons over whom the court canexercise jurisdiction.

There is no statutory basis for recognition or assistance withforeign insolvency proceedings. However, the courts in Hong Konghave shown a willingness to cooperate with the courts of foreignjurisdictions. As a practical matter, the courts in Hong Kong willrecognise foreign insolvency proceedings and representativesappointed in such proceedings, and will recognise the foreignrepresentatives’ powers to collect assets (although the Hong Kongcourts will require proceeds of assets to be applied in accordancewith the order of distributions prescribed by Hong Kong law). It isrecommended that separate winding up proceedings be initiated inHong Kong where a foreign representative seeks to protect thecollective nature of the foreign proceedings (e.g. by restrainingcreditors from attaching assets).






India


IntroductionThis section provides a general outline of the main corporateinsolvency procedures in India. The primary legislation governingcorporate insolvency in India is the Companies Act, 1956 (the“Companies Act”). Amendments have been proposed to thewinding up provisions in the Companies Act pursuant to theCompanies (Amendment) Act, 2002 (the “Amendment Act”) andthe Companies Bill, 2011 (the “Companies Bill”), but to datethese amendments are not in force.

The Companies Act is supplemented by the Sick IndustrialCompanies (Special Provisions) Act, 1985 (“SICA”), which dealswith the rescue and rehabilitation of sick industrial units (asdiscussed below in the section entitled Sick IndustrialCompanies). In addition, the Securitisation and Reconstruction ofFinancial Assets and Enforcement of Security Interest Act, 2002(“SARFAESI”) deals with the enforcement of security by creditors,including in the case of the winding up of a company.

Methods of winding upIn India, the winding up of a corporate entity may take place by:

n winding up ordered by the Court (sometimes called“compulsory winding up”);

n voluntary winding up initiated either by: (1) members; or(2) creditors; or

n winding up under the supervision of the Court.

Under proposed amendments, the powers of the Court inwinding up proceedings will be delegated to the NationalCompany Law Tribunal (the “Tribunal”).

Compulsory winding upA company may be wound up by the Court following thepresentation of a petition for winding up in certain circumstances.The most common grounds are:

(1) where the company is unable to pay its debts; and

(2) where the Court is of the opinion that it is just and equitablefor the company to be wound up.

A company is deemed unable to pay its debts in thefollowing circumstances:

(a) it fails to pay a debt of INR500 or more (we note that theAmendment Act proposes to increase this threshold toINR100,000) within three weeks of demand by a creditor;

(b) it fails to pay in full a debt issued under a judgment, decree ororder of a Court; or

IndiaContributed by AZB & Partners, Mumbai, India

Key Elements:n Special insolvency-related procedures for industrial

companies are available.

n Employees are conferred high priority on distribution ofliquidated assets.

n Indian insolvency laws do not have any extra-territorialjurisdiction, nor do they provide for the recognition offoreign insolvency proceedings.

n Amendments have been recently proposed to theinsolvency laws in India.


Ashwin Ramanathan, Partner23rd Floor, Express Tower, Nariman PointMumbai – 400 021IndiaT: +91 22 6639 6680F: +91 22 6639 6888


(c) it is proved to the satisfaction of the Court that the companyis unable to pay its debts and is commercially insolvent.

The Amendment Act proposes a number of additional grounds toinitiate the winding up of a company, including where the companyhas acted against the interests of the sovereignty, integrity andsecurity of India, its public order or decency and morality.

ProcedureWinding up commences on the date of presentation of the windingup petition, provided the document is admitted by the Court.

The Court, at its discretion, may appoint an official liquidator (as aprovisional liquidator) prior to making a winding up order. On themaking of a winding up order, the provisional liquidator willbecome the official liquidator.

Company personnel must verify and submit a companystatement of affairs to the official liquidator within 21 days ofeither the appointment of the official liquidator or the issue of thewinding up order. The official liquidator will then take into itscustody all the property, effects and actionable claims of thecompany, from the date of the winding up order by the Court orwhen the official liquidator is appointed.

The official liquidator, by way of advertisement, will also fix a datefor all creditors of the company to prove their debts. Afterconducting an investigation, the official liquidator willcommunicate the acceptance or rejection of each debt to therespective creditors. Within three months of the date of thecreditors’ meeting, the official liquidator will file a certificate withthe Court with respect to the debts claimed by creditors,including whether they were accepted or rejected.

On the appointment of a liquidator, all the powers of the board ofdirectors (including the managing director) and the manager, ifany, cease. As soon as the affairs of the company are fullywound up, the liquidator is required to:

(a) draw up an account of the winding up, showing how thewinding up has been conducted and the property of thecompany disposed of; and

(b) call a general meeting of the creditors for the purpose of layingthe account before them, and giving any explanation thereof.

The appointment of the liquidator does not, however, completelypreclude the involvement of the Court and the official liquidator.Within one week after the meeting, the liquidator is required tosend to the Registrar of Companies and the official liquidator, acopy of the accounts, and confirmation of the meeting. Onscrutiny of the books and accounts of the company, the officialliquidator must report any prejudicial matters to the Court (in thisregard, see the section on Lender Liability below). The Court maydirect the official liquidator to further investigate the affairs of thecompany, and for that purpose the Court shall invest the officialliquidator with all such powers it deems fit.

On receipt of the official liquidator’s report, the Court may makean order to dissolve the company, or make any other order thatthe circumstances of the case permit.

In such circumstances, the winding up will therefore commenceas a voluntary winding up until the Court passes an ordersubjecting the procedure to the supervision of the Court.

The company’s assets will be distributed according to the orderof priority specified in the Companies Act.



ManagementAs mentioned above, if a company is being wound up by theCourt, the winding up order and appointment of the officialliquidator has the effect of discharging all officers and employeesof the company and causing the directors’ power to cease.

Shareholder LiabilityThe Court is empowered to make calls on all or any of thecontributories, to the extent of their liability, for: (i) the payment ofmoney to satisfy the debts and liabilities of the company;(ii) meeting the expenses of the winding up; and (iii) the adjustmentof the rights of the contributories amongst themselves.

Proof of debtsIn any form of winding up of an insolvent company, theapplicable rules with regards to proof of debts, the valuation ofannuities and future and contingent liabilities, and the respectiverights of secured and unsecured creditors are contained in theCompanies Act together with Sections 46 to 50 of thePresidency Towns Insolvency Act, 1909 and Sections 45 to 50 ofthe Provincial Insolvency Act, 1920. These rules set out that allunsecured creditors have to adduce proof of their debts in theprescribed manner and all such debts are to be paid pari passu.The rules provide for all debts and liabilities, whether unsecured,present or future, certain or contingent, to which the debtor issubject when it is adjudged insolvent, or which the debtor mayincur before the date of such adjudication, are deemed to bedebts provable in insolvency with the exception of:

(a) unliquidated damages arising otherwise than by contract orbreach of trust; and

(b) debts contracted from a person who had notice of thepresentation of an insolvency petition against the debtor.

The rules also contain the principle of set-off, whereby the sumdue from one party shall be set-off against any sum due from theother and only the balance shall remain payable.

Sick Industrial CompaniesAny company registered for five years or more which has, at theend of any financial year, accumulated losses equal to orexceeding an amount equal to its entire paid up capital and freereserves is considered to be a “sick industrial company” underSICA. Such a company may be referred by its board of directors,the central or state government, the Reserve Bank of India or itscreditors to the Board of Industrial and Financial Reconstruction(“BIFR”) who may then conduct an enquiry into whether thecompany is “sick” or not.

Where the company is found to be “sick”, the BIFR may eithergive the company a reasonable period of time to raise its networth above its accumulated losses or construct a scheme forthe company’s financial reconstruction. If the BIFR is of theopinion that the sick industrial company cannot be rescued evenby way of a scheme, it may order the sick industrial company bewound up.

The proposed Amendment Act, if implemented, would repealSICA and the provisions relating to sick industries would beincorporated in the Companies Act. Furthermore, the powers ofthe BIFR would be vested in a Tribunal, which could wind up acompany deemed unable to be rescued.

Voluntary winding upA company may voluntarily wind up its affairs if it is unable tocarry on its business, it was formed for a limited purpose, or it is



unable to meet its financial obligations. The object of voluntarywinding up is to realise the assets, pay off the liabilities anddistribute the surplus as expeditiously as possible.

Under the Companies Act, there are two methods of voluntarilywinding up a company:

(a) a creditors’ voluntary winding up; and

(b) a members’ voluntary winding up.

A members’ voluntary winding up only relates to the winding up ofa solvent company, so it is not dealt with in any detail in this note.

Creditors’ voluntary winding upIn the case of a voluntary winding up by the creditors, where thedirectors are unable to guarantee the company’s solvency, thecreditors are entitled to secure control of the winding up tosafeguard their interests.

When a general meeting of the company’s shareholders is heldfor the purpose of winding up the company on an insolventbasis, the company must also call a meeting of the creditors tobe held on the same day or the next day after such shareholders’meeting. The creditors’ meeting shall be presided over by adirector of the company, at which he or she shall present to thecreditors a full statement of the affairs of the company, and a listof creditors and their estimated claims.

The creditors and the members of the company, at theirrespective meetings, may nominate a liquidator of the company.If the creditors and the company nominate different persons asliquidator, however, the choice of the creditors will prevail. On theappointment of a liquidator, all the powers of the management

cease except insofar as they have been sanctioned by a generalmeeting of directors.

The Companies Bill proposes that in the case of a voluntarywinding up, a liquidator would be chosen from among the panelselected by the Central Government.

The proposed role of the Tribunal in a voluntary winding up asenvisaged under the Companies Bill is that the Tribunal may passan order, upon the application of a member/shareholder orcreditor, to determine any question relating to the winding up orexercise any other power that the Tribunal may have, if thewinding up is being conducted by the Tribunal.

Power to make calls on the contributoriesThe liquidator may exercise the powers of the Court in makingcalls on contributories in the course of the winding up of thecompany. Under the proposed Companies Bill, the liquidatorwould have the right to adjust the rights of the contributories, butnot to make calls. In order to make or enforce calls, anapplication must be made by the liquidator to the Tribunal, whichmay exercise its powers to make and enforce calls oncontributories similar to the powers that the liquidator has whenconducting a compulsory winding up.

Proposal: small business winding upThe Companies Bill proposes a summary winding up procedurefor companies that have assets less than Rs. 10,000,000 on theirbooks. The official liquidator may take control of all assets andactionable claims of the company. It may then sell all assetswithin sixty days from its appointment, and call upon creditors toprove their claims within thirty days from its appointment.



A creditor may file an appeal against the decision of the officialliquidator settling his claims within 30 days.

ReceivershipDefault rules for the appointment and powers of a receiver areset out under the Companies Act and the Civil Procedure Code,1908. These rules may be altered by contractual arrangementbetween the debtor and its creditor(s) (or the representatives ofthe creditor(s)).

A receiver may be appointed for the benefit of the holders ofdebentures or bonds for all or substantially all of the assets of thecompany pursuant to a debenture trust deed or other instrument.The role of the receiver is to protect the property charged infavour of the debenture-holders. The circumstances in which thisappointment may be made include:

(i) where there is danger of property being lost or diminishedin value;

(ii) where arrears of principal and/or interest are to be paid;

(iii) where the company is being liquidated or wound-up; and

(iv) where there are decrees and judgments against the company.

The receiver is an agent of the company (and not of thedebenture-holder). It conducts the company’s affairs, whichincludes realising debts, securities or other dues of personswhose interests are secured by the debenture instrument.

A receiver may also be appointed with the leave of the Court bythe debenture-holders. A receiver cannot make or enforce calls ifthe company is in liquidation, because the official liquidator holdssole authority (unless the receiver has obtained the leave of the

Court in this regard). In most cases, the Court appoints theofficial liquidator as the receiver.

Further, a civil court is competent to appoint a receiver over anyproperty at its discretion, where it appears to the civil court to bejust and convenient. The civil court also has the discretionarypower to transfer possession or custody of the property fromits owner to the receiver, and/or to confer upon the receiverpowers for:

(a) the institution or defense of a suit;

(b) realisation, management, protection, preservation andimprovement of the insolvent party’s property;

(c) the collection of rents and profits;

(d) the application and disposal of such rents and profits;

(e) execution of documents; and/or

(f) such other power as the Court thinks fit.

Reorganisation or Composition PlanA compromise or arrangement may be proposed between acompany and its creditors, or a company and its shareholders.Following an application from the company, its creditors orshareholders, or the liquidator (during liquidation), the Court hasdiscretion to call a meeting of creditors and shareholders of acompany. If a compromise or arrangement is approved bymajority vote (75% in value) of the creditors or the shareholders(as the case may be), then the Court may sanction the schemeof compromise or arrangement, which shall then becomebinding on all the creditors, shareholders and contributories ofthe company.



Priority of DistributionsUnder the Companies Act, the order of priority in which the debtsof the company are distributed is as follows:

(a) all revenues, taxes, cesses and rates due from the companyto the Central or State Government or any local authority;

(b) all wages or salaries payable to the company’s employees(other than workmen), including holiday remuneration andprovident fund and pension fund dues, subject to the limitnotified for this purpose by the Central Government;

These debts will rank equally among themselves and in the eventof insufficient assets of the company, shall have priority over theclaims of debenture-holders under any floating charge created bythe company.

(c) unsecured creditors including debenture-holders under afloating charge;

(d) preference shareholders; and

(e) equity shareholders.

Secured CreditorsA secured creditor may choose to stand wholly outside thewinding up proceedings and seek to realise his security, or hecan opt to relinquish his security and prove his debt, in whichcase he would be ranked in parallel to an unsecured creditor.

If the secured creditor or secured debenture-holder chooses torealise his security, then employee liabilities are statutorilyrequired to be paid proportionately from the proceeds inproportion to their liabilities. The SARFAESI, which deals with therights of recovery and enforcement by secured creditors,

provides that where a company is in liquidation, the securedcreditor may, with the leave of the Court, retain the sale proceedsof his secured asset upon depositing the employee liabilities withthe official liquidator. The official liquidator is required to intimatethe existence of and the actual or estimated amount of employeeliabilities to the secured creditor. Where the secured creditordeposits an estimated amount of employee liabilities, it will beliable for any shortfall and entitled to a refund for anyover-payment once the employee liabilities have been finalised. Ifthe proceeds of the security are insufficient to discharge the debtowing to the secured creditor, including because of the paymentof employee liabilities, the balance of the debt unsatisfied willrank as an unsecured claim.

Thereafter, the extent of the debt unsatisfied, due to the paymentof the employee liabilities or the amount of the employee’sportion in the security of the secured creditor, whichever is lesser,shall rank pari passu with the employee liabilities, and suchsecured creditor and the employee would have to be paid fromthe other assets of the company in priority to all other debts. Forthe balance of the amount which could not be covered by thesecurity, such secured creditor will rank as an ordinary creditorand will have to prove his debt.

Director LiabilityThe officers of the company which is being wound up may besubject to penalties, including imprisonment and fines, for notcooperating with the liquidator and not providing all relevantinformation about the company and its debts, or not deliveringproperty or books and records of the company that may be in hiscontrol. Officers are also liable to imprisonment or fines if theyintentionally: (a) conceal or fraudulently remove any property ofthe company; (b) make material omissions regarding the



company; (c) conceal, mutilate or destroy the books and recordsof the company or are privy to any of the foregoing; (d) transferany of the property of the company; or (e) obtain credit on behalfof the company or make any false representations on behalf ofthe company. Additionally, there are penalties for the falsificationof accounts and improper maintenance of accounts.

Voidable TransactionsThe principle of ‘fraudulent preference’ is contained in Section531 of the Companies Act. Under the Companies Act, the Courtor the official liquidator can set aside any transfer of property,payment, or property-related transaction effected in thesix months prior to the commencement of the winding up withthe intention of preferring a particular creditor.

Therefore, in the event of a winding up, any payment made bythe company which satisfies the requirements of Section 531 ofthe Companies Act could be deemed to be a fraudulentpreference and consequently be invalidated by the Court orofficial liquidator. However, a payment/transaction which wasentered into within a period of six months prior to thecommencement of the winding up will not be presumed to be afraudulent preference merely because it was entered into within aperiod of six months prior to the commencement of winding up.The following factors have been held by Indian courts to benecessary to establish a transaction which constitutes afraudulent preference under the Companies Act:

(a) the dominant intent of the debtor must be to prefer aparticular creditor; and

(b) the preference must be the result of an act of free will.

In the event of a fraudulent preference, the liquidator is entitled torecover money or property paid to any person who has beenfraudulently preferred. In addition, the directors of a companywho make payments by way of a fraudulent preference may bejointly and severally liable to repay such preferred amounts. Theburden of proving that a transaction is a fraudulent preference ison the party (e.g. the creditor or a liquidator) who wants theCourt to invalidate the transaction.

GuaranteesIndian companies may issue financial or performance guaranteesin relation to the obligations undertaken by another company(whether or not the other company is related to the guarantorcompany). There are, however, certain restrictions that apply tothe issue of such guarantees.

Under the Companies Act, for instance, a public limitedcompany may not issue a guarantee should its value exceed60% of its paid-up share capital and free reserves, or 100% ofits free reserves (whichever is higher), unless a special resolutionhas been passed by the shareholders of the company. Theselimits are not applicable in certain circumstances such as whereguarantees are issued by private limited companies, or where aholding company provides a loan to its wholly owned subsidiary.

Moreover, since India is an exchange-controlled jurisdiction,cross-border guarantees are subject to compliance with theForeign Exchange Management Act, 1999 and the related rulesand regulations. Therefore, Indian subsidiaries will not, generallyspeaking, be permitted to issue guarantees for obligations of theirdirect or indirect foreign parent entities without regulatory approval.



Powers and duties of the liquidatorUnder the Companies Act, the liquidator is empowered to payany classes of creditors in full, make compromises andarrangements with creditors or other persons to whom thecompany may have any liabilities, and cause a completedischarge of the company’s liabilities and claims. The liquidatormay also make any calls regarding any claims or debts due tothe company.

The liquidator is also permitted to disclaim certain property of thecompany designated to be “onerous property”. Onerous propertyis defined as:

(a) land of any tenure, burdened with onerous covenants;

(b) shares or stock in companies;

(c) any other property which is unsaleable or is not readilysaleable, by reason of binding the possessor either to theperformance of any onerous act or the payment of any sumof money; or

(d) unprofitable contracts.

If a person interested in any onerous property applies to theliquidator, inquiring whether or not the property will bedisclaimed, and the liquidator does not respond within 28 daysor any extended time permitted by the Court, the liquidator shallbe deemed to have adopted the onerous property and will berequired to discharge it during the winding up proceedings.

If the liquidator has defaulted in making any filing or giving anynotice it is required by law to give, a creditor, member or theRegistrar of Companies may make an application to the Court

requiring it to remedy the default, and the costs of the applicationwill be borne by the liquidator. Additionally, penalties may beimposed on the liquidator.

The Companies Bill proposes to expand the powers of theliquidator. In addition, it proposes that an official liquidatorappointed by the Tribunal may be removed and replaced on thegrounds of fraud, misconduct, incompetence or conflict ofinterest, who may, in the case of a voluntary winding up, be finedup to INR100,000.

New money lendingIndian law does not provide special or preferential treatment to“new monies” in the course of suspension of payments,reorganisation or composition. That said, when the High Court(in whose jurisdiction the registered office of a company islocated) passes an order sanctioning a compromise or anarrangement in respect of a company, it may pass additionalorders and give directions in regard to any matter it considersnecessary for the proper working of the reorganisation orcomposition (including matters relating to the treatment ofmonies provided during any reorganisation/composition). Suchan order may also provide for the transfer of any monies,property or liabilities to the transferee-company.

When a winding up order has been passed or where a provisionalliquidator has been appointed, the liquidator takes custody of allthe property, effects and actionable claims to which the companyis entitled. The Court may also require any contributory, trustee,receiver, banker, agent, officer or other employee of the companyto pay any money under his or her control (to which the companyis on its face entitled) to the liquidator.



Recognition of foreign insolvencyproceedingsIndian insolvency laws do not have any extra-territorialjurisdiction, nor do they provide for the recognition of foreigninsolvency proceedings. The UNCITRAL Model Law onCross-Border Insolvency caters for this deficiency and deals withthe recognition of foreign insolvency proceedings. India has beenconsidering the adoption of the UNCITRAL Model Law onCross-Border Insolvency to equip Indian law with the ability todeal with issues relating to cross border insolvency.




Indonesia


IntroductionThis section provides a general outline of the main corporateinsolvency procedures in Indonesia. Indonesia’s insolvency law isprimarily governed by Law No. 37 of 2004 on Bankruptcy andSuspension of Debt Payments (the “Bankruptcy Law”) andsupplemented by Law No. 40 of 2007 on Limited LiabilityCompanies (the “Company Law”). The Bankruptcy Law appliesto both corporations and individuals.

The Bankruptcy Law is both rehabilitative and distributive innature. There are two types of proceedings which may beinstituted under the Bankruptcy Law: (1) bankruptcy; and(2) suspension of debt payments.

In bankruptcy, the debtor’s assets are liquidated and distributedto creditors based on their respective priorities. Suspension ofdebt payments provides the debtor with relief against creditorsby way of a moratorium to allow the debtor to reorganise andcontinue its business on terms agreed by the creditors.

Insolvency ProcedureInsolvency procedures in Indonesia are commenced through theCommercial Court by the filing of:

(1) a bankruptcy petition; and/or

(2) an application for suspension of debt payments.

If the bankruptcy petition and the application for suspension of debtpayments are brought concurrently, the petition for suspension ofdebt payments must be adjudicated upon first. If the petition forsuspension of debt payments is submitted after the bankruptcypetition, in order to be adjudicated upon first, it must be submittedat the first session of the bankruptcy petition examination.

Bankruptcy petitionThe procedure for filing a bankruptcy petition is based on the duedate of the unpaid debt. The Commercial Court may declare adebtor bankrupt where it has two or more creditors, has not paidat least one of its debts that have fallen due and those facts canbe proven simply.

To prevent a debtor from disposing of its assets and prejudicingthe interests of the creditors, the petitioner may file a petition withthe Commercial Court to seize all or part of the assets of thedebtor. The Commercial Court may also appoint an interimcurator to supervise the management of the business of thedebtor, the payment of its creditors, and the assignment orencumbrance of the debtor’s assets, which in bankruptcy fallsunder the authority of the curator.

IndonesiaContributed by Mochtar Karuwin Komar

Key Elements:n Bankruptcy or suspension of debt payments involves

appointment of a curator or an administrator.

n Moratorium available (and extends to secured creditors).

n Suspension of debt payments procedures focuses oncompany rescue.

n Cram down of creditors available.


Mulyana, PartnerSandi Adila, Senior Associate14th Floor Wisma Metropolitan IIJl. Jend. Sudirman Kav. 31Jakarta 12920, IndonesiaT: +62 21 571 1130F: +62 21 571 1162, +62 21 570 1686www.mkklaw.net


The following persons may submit a bankruptcy petition tothe Court:

n the debtor;

n one or more creditors of the debtor;

n the Public Prosecutor, if the matter is of public interest;

n the Bank of Indonesia (i.e. the central bank), in the instancethat the debtor is a bank as defined under Indonesianbanking law;

n the Indonesian Capital Market and Financial InstitutionsSupervisory Authority (previously known as the Capital MarketSupervisory Authority), if the debtor is a securities company,stock exchange company, clearing and custodian institution,or settlement and depository institution; and

n the Minister of Finance, if the debtor is an insurancecompany, a reinsurance company, pension fund or stateowned enterprise engaging in a field of public interest (i.e. anenterprise whose entire capital is owned by the state and isnot divided by shares).

The creditor must be represented by a lawyer qualified underIndonesian law, unless the petition is filed by the PublicProsecutor, the Bank of Indonesia, the Indonesian CapitalMarket, the Financial Institutions Supervisory Authority, or theMinister of Finance.

The Commercial Court will hand down a decision within sixty daysof the petition’s registration date. If the Commercial Court acceptsthe petition, it may declare the debtor bankrupt and appoint asupervisory judge and a curator (receiver). An appeal of the decisionby the Commercial Court can be made to the Supreme Court.

If the Commercial Court’s decision is appealed, the bankruptcywill continue, with the curator responsible for the management ofthe company and the settlement of any claims until the SupremeCourt hands down its decision. If the bankruptcy declaration isreversed by the Supreme Court, any actions taken by the curatorprior to the notice of cancellation will remain valid and bindingupon the debtor.

The curator is required to take all necessary steps to preservethe bankrupt estate and will attend to the realisation of thecompany’s assets, review the creditors’ claims, and co-ordinatetheir acceptance in conjunction with the supervisory judge. It willalso attend to the distribution of funds to creditors according totheir respective priorities.

The scale of fees for curators is determined by a panel of judgesafter the bankruptcy has been concluded, and is based on theremuneration guidelines specified by the Ministerial Regulation,which currently includes fees ranging from 1% to 8% of the valueof the bankrupt estate. Under the new Minister Regulation issuedon 11 January 2013, in case the bankruptcy declaration iscancelled by the Supreme Court at the level of cassation or civilreview, the fees of the curators must be borne by the petitioner.The Bankruptcy Law imposes personal liability on a curator forany loss to the bankrupt estate caused by the “fault ornegligence” of the curator in performing his duties.

Effect of bankruptcy declarationA bankruptcy declaration does not automatically deem that thedebtor is insolvent. Under the Bankruptcy Law, a debtor may bedeclared bankrupt by the Commercial Court if it has two or morecreditors and has not paid at least one of its debts that have fallendue. Upon the issuance of a bankruptcy declaration, however, the



debtor forfeits the right to manage its assets. The managementand settlement of the bankrupt estate, which includes all assets ofthe bankrupt debtor together with any assets acquiredpost-bankruptcy, will be carried out by the appointed curator.Whilst secured assets are not included in the bankrupt estate,secured creditors are prevented from executing their rights for amaximum period of 90 days from the date of the bankruptcydeclaration. Such a stay does not apply to enforcement ofsecurity in the form of cash. The secured creditors can enforcetheir security by selling the encumbered assets through publicauction or they can ask for the assistance of the court.

The curator may temporarily continue to operate the debtor’sbusiness subject to approval of the supervisory judge. In doingso, it may borrow funds secured against any of the debtor’sunencumbered assets.

Any contract entered into by the debtor after the declaration ofbankruptcy may not be paid from the assets of the bankrupt estate,unless it is for the estate’s benefit. The curator may bring or defendlawsuits concerning the rights and obligations of the debtor.

The curator may enter into new agreements or adoptpre-bankruptcy agreements with third parties, who as a resultbecome creditors of the company with priority to repayment overpre-petition liabilities. The curator may also terminateemployment contracts, leases and other agreements. In relationto leases, the curator may only terminate according to the noticeperiod stipulated in the lease. In the event that advancepayments have been made, the lease may not be terminatedprior to the expiry of the period covered by the payments. TheBankruptcy Law does not specify a timeframe within which acurator may terminate contracts, although the supervisory judge

may determine the timeframe. Losses or damages arising as aresult of a curator not adopting a pre-bankruptcy contract aretreated as unsecured claims against the bankrupt estate.

Legal proceedings against a debtor will fall by operation of law.Legal action commenced by the debtor prior to the bankruptcymay be adjourned by the defendant in order to afford the curatorthe chance to consider whether to proceed with the action. TheBankruptcy Law does not specify the timeframe in which a curatormust respond to temporary adjournments of legal proceedings.

A secured creditor, namely one who possesses a lien, securityinterest, mortgage or other collateral right, may enforce its rightsduring bankruptcy save for during the first 90 days, during whicha stay of enforcement of security exists. This stay of proceedingsis not applicable to creditors who possess security over cashdeposits or the right to set-off debts. Creditors who enforce theirsecurity must account to the curator for the balance of anyproceeds remaining after payment of the debt, interest and costsof realisation due to the secured creditor.

Creditors’ claimsWithin 14 days from the declaration of bankruptcy, thesupervisory judge will determine the deadline for the filing ofcreditors’ claims and the time and place of the creditors’ meetingfor the verification of such claims. The curator will notify thecreditors in writing within five days of the determination of thisdate. The first creditors’ meeting must be held within 30 daysfrom the date of the bankruptcy declaration.

The creditors may also establish a creditors’ committee toconsult with the curator. The curator is obliged to obtaininstructions from the creditors’ committee on certain matters, but



it is not bound by the advice of the committee. If the curatordoes not agree with the instructions of the creditors’ committee,the creditors’ committee may request the supervisory judge todecide the matter.

The creditors’ claims must be submitted in writing to the curator,indicating the amount and the nature of the debt, and must beaccompanied by evidence substantiating the amount. The curatorwill determine which claims are acceptable and enter them into alist of acknowledged debts, which will be legally enforceable onbankruptcy. The curator is required to provide copies of the lists ofaccepted claims and contested claims to the creditors and notifythem of the time and place for the debt verification meeting.Creditors have the right to request information from the curator inrelation to their claim. The contested claims will be settled in aseparate hearing before the court.

Suspension of debt payment proceduresThe suspension of debt payments process is a court-supervisedrehabilitative mechanism which provides the debtor with time toput forward a settlement and debt restructuring proposal forcreditors to consider whilst the debtor is under the protection ofa moratorium. Payments to creditors may be suspended for amaximum period of 270 days.

A debtor may also voluntarily apply for a suspension of debtpayments, for the purpose of submitting a composition plan thatwill include an offer of payment to unsecured creditors for all orpart of its debts. The petition for the suspension of paymentsmay be filed by:

n the debtor;

n one or more creditors of the debtor;

n the Bank of Indonesia, in the instance that the debtor is abank as defined by Indonesia’s banking laws;

n Indonesia’s Capital Market and Financial Institutions SupervisoryAuthority, in the instance that the debtor is a security house,stock exchange company, clearing and custodian institution orsettlement and depository institution; or

n the Minister of Finance, in the instance that the debtor is aninsurance company, a reinsurance company, pension fund orstate owned enterprise engaging in a field of public interest.

Effect of suspension of debtsIf the debtor files the petition, the court will grant a temporarysuspension of debt payments and appoint a supervisory judgeand one or more independent administrators, who will, with thedebtor’s management, jointly manage the debtor’s assets. If thepetition is filed by a creditor, the court will, within 20 days fromthe date of filing the petition, grant temporary suspension of debtpayments unless the court accepts the debtor’s objection.

The administrator must immediately announce the decision onthe provisional suspension of debt payments in the OfficialGazette of the Republic of Indonesia and in at least two dailynewspapers designated by the supervisory judge. Theannouncement must include an invitation to creditors to attend acourt proceeding for the purpose of approving or rejecting thedebt settlement plan proposed by the debtor. The creditors’meeting must be conducted within 45 days from the date thetemporary suspension of debt payments order was made.

The supervisory judge will chair the meeting and each creditor isentitled to be heard. If the composition plan is attached to thepetition for temporary suspension of debt payments, a vote on



whether to accept the plan may take place. Alternatively, at therequest of the debtor, the creditors will decide whether to grantor refuse a permanent suspension of debt payments with theintention of allowing the debtor, administrator and creditors timeto consider and agree to a composition plan at a future meeting.The maximum period for both the temporary and permanentsuspension of debt payments together is 270 days. If thecreditors decide not to grant a permanent suspension of debtpayments, the debtor will be declared bankrupt.

The granting of the permanent suspension of debt payments andextension in which the debtor is required to submit a compositionplan requires the approval of: (i) more than half of the unsecuredcreditors who are present at the hearing and who represent atleast two-thirds of unsecured claims; and (ii) more than half of thesecured creditors who are in attendance at the hearing and whorepresent at least two-thirds of secured claims.

The suspension of debt payments gives rise to a moratoriumover unsecured claims, as well as a stay of proceedings over anylegal actions commenced against the debtor. Debt payments dueto secured creditors are not suspended, however securedcreditors and creditors with preferred rights over certain assets ofthe debtor are subject to a moratorium and stay of proceedings.

The administrator may disclaim contracts entered into by thedebtor with third parties prior to the suspension of debtpayments. The party contracting with the debtor is obliged toseek confirmation from the administrator as to whether he or shewill continue or terminate the contract. A contracting party maysubmit a claim for damages arising from the termination of acontract which will rank as an unsecured debt.

Once a composition plan has been prepared and presented tothe creditors, the creditors will vote on the plan. Adoption of theplan, which is binding on all creditors, requires the approval of:(i) more than half of the unsecured creditors who are present atthe hearing and who represent at least two-thirds of unsecuredclaims; and (ii) more than half of the secured creditors who are inattendance at the hearing and who represent at least two-thirdsof secured claims.

According to the Bankruptcy Law, a request to terminate thesuspension of debt payments process may be initiated by thesupervisory judge, one or more creditors, or the CommercialCourt in the following circumstances: (i) the debtor acts in badfaith in operating the business during the suspension of paymentprocess; (ii) the debtor attempts to prejudice the rights of itscreditors; (iii) the debtor engages in conduct resulting in newobligations without the administrator’s approval; (iv) the debtorfails to perform obligations imposed by the court or theadministrator; (v) during the period of suspension of debtpayments, the condition of the debtor’s business substantiallydeteriorates to the extent that it is evident that it is not in theinterest of creditors for the suspension of debt payments tocontinue; or (vi) the condition of the debtor is such that it cannotbe expected to satisfy its obligations.

An application for the termination of suspension of debtpayments is heard by the court in the presence of the applicant,the debtor (via legal counsel) and its directors. If the debtormakes the application, the administrator, creditors and thedebtor’s management will be present and arguments will bemade for and against the application. If the court terminates thesuspension of debt payments process, the debtor is thendeclared bankrupt.



Director liabilityThe Bankruptcy Law contains civil sanctions. If a debtor isdeclared bankrupt and does not have sufficient assets to satisfyits liabilities, the directors may be held personally liable for anylosses unless it can be established that the losses were notdirectly attributable to their negligence. The breach of anydirector’s duties will also give rise to civil penalties underIndonesian law. Criminal sanctions under the Indonesian CriminalCode may also be imposed on the directors of a bankruptcompany. For example, a director may face criminal sanctions ifhe authorised or permitted the incurring of further obligations at atime when bankruptcy was inevitable.

GuaranteesAn Indonesian limited liability company can provide a guaranteesubject to obtaining the required corporate approval as set out inthe company’s articles of association and provided there is also acorporate benefit. A guarantee may be susceptible to challenge ifit is granted by a potentially bankrupt company.

PrioritySecured creditors have a priority claim over the proceeds of thesale of any encumbered assets that have been secured in theirfavour. The priority of claims in descending order is broadly setout as follows:

n court costs of foreclosure of movable and immovable goods,which are to be paid from the proceeds of such foreclosureand enjoy priority over all secured claims and privilegedclaims pursuant to the Indonesian Civil Code;

n tax liens;

n secured creditors (pledgees, mortgagees, fiduciarytransferees and fiduciary assignees);

n creditors holding privileged claims under the Indonesian CivilCode and employee entitlements under the IndonesianManpower Law;

n all remaining claims.

Claims denominated in foreign currencies are determined by theprevailing exchange rate on the date of bankruptcy and must beexpressed in Indonesian Rupiah.

New money lendingThe curator is able to borrow funds either on an unsecuredbasis, or on a secured basis against any unencumbered assetsof the debtor.

Cross-border insolvencyForeign creditors’ claims are recognised on the same basis asthe claims of Indonesian creditors. There are no additionalrequirements for foreign creditors’ claims to be recognised byIndonesian Courts except that, in practice, such claims and theirsupporting documentation are usually required to be translatedinto and submitted in Indonesian.

The Bankruptcy Law adopts universal principles with respect tocross-border insolvency issues arising from a bankruptcy inIndonesia, so that local bankruptcy proceedings cover the assetsof the debtor located outside Indonesia. However, Indonesian law



adopts the territorial effectiveness principle with respect tobankruptcy proceedings commenced in foreign courts. As aresult, foreign insolvency decrees, orders or declarations will notbe recognised in Indonesian Courts nor directly impact uponassets of the debtor located in Indonesia. Foreign courtjudgments with respect to enforcement of a debt or attachmentto assets of an Indonesian debtor are not recognised byIndonesian Courts unless provided for by specific treatyarrangements. At present, there are no existing treaties withrespect to insolvency laws. The Courts may, however, considerthese claims as part of legal action commenced in IndonesianCourts. Foreign debtors who obtain a judgment in a foreign courtagainst an Indonesian debtor will need to commence localproceedings in the Indonesian Courts in order to enforce thejudgment against the assets of the Indonesian debtor.




Japan


IntroductionThis section provides a general outline of the main corporateinsolvency procedures in Japan. Under Japanese insolvencylaw, there are four types of statutory proceedings. These aredivided into procedures for the reorganisation and rehabilitationof the debtor, and terminal proceedings that end in theliquidation of a corporation.

Procedures for the liquidation of companies:

(1) Bankruptcy (hasan) is a proceeding of last resort for a debtorunder the Bankruptcy Law (hasan ho), whether as an originalproceeding or as a consequence of the failure of corporatereorganisation, civil rehabilitation or special liquidation. Thisprocedure aims to completely dissolve the insolvent business,liquidate the debtor’s assets and distribute the realised cashto creditors on a pro rata basis.

(2) Special liquidation (tokubetsu seisan) is a corporate liquidationprocedure under the Company Law (kaisha ho). Thisprocedure is used when a special resolution of ashareholders’ meeting has been passed to dissolve acompany that is suspected to have excessive debts.

Procedures governing reorganisation/rehabilitation:

(1) Corporate reorganisation (kaisha kosei) under the CorporateReorganisation Law (kaisha kosei hou) is intended to be usedfor the rehabilitation of large corporate debtors and containssome significant limitations on the rights of creditors. Its purposeis to maintain and reorganise the debtor’s business by(i) changing the company’s structure, and (ii) restricting the rightsof both secured and unsecured creditors against the debtor.

(2) Civil rehabilitation (minji saisei) aims to implement fair, orderlyand efficient proceedings for the rehabilitation of corporatedebtors and individuals. This option has been available since1 April 2000 under the Civil Rehabilitation Law (minji saiseihou), which replaces the now defunct Composition Law(wagi hou).

The Recognition and Aid for Foreign Insolvency Proceedings Law(gaikoku tosan shonin tetsuduki no shonin enjo ni kansuruhoritsu) provides procedures for dealing with foreign courtinsolvency proceedings of multi-national enterprises.

In addition to the above, a non-statutory voluntary arrangement(nin-i seiri) is commonly used for the liquidation/dissolution orrehabilitation of insolvent companies.

Bankruptcy (hasan)All types of companies and individuals (including foreigncompanies and individuals) may be the subject of bankruptcyproceedings. The proceedings apply to the debtor’s assetslocated both inside and outside Japan (in the case of assetsoutside Japan, the recognition of Japanese insolvency

JapanContributed by Clifford Chance (Tokyo office)

Key Elements:n Civil rehabilitation is a debtor-in-possession

reorganisation process

n Debtor-in-possession financing available incertain circumstances

n Injunction available to stay proceedings



proceedings in the foreign country is required). The BankruptcyLaw is applicable to a foreign company, so long as the foreigncompany has assets in Japan. Furthermore, claims which maybe enforced under the Civil Procedure Code (minji sosho hou) aredeemed to be located in Japan.

If a company (a) is unable to meet its payment obligations as theyfall due (shiharai funou), (b) suspends payment of its debt (shiharaiteishi) (unless there is evidence that the company is able to meetits payment obligations), or (c) has total liabilities that exceed thevalue of its assets (saimu choka), a petition for bankruptcy can befiled by: (i) any of the company’s creditors; (ii) any of thecompany’s directors (in case the debtor is a joint-stock company(kabusiki kaisha; “KK”); or (iii) the company itself.

Following the submission of a petition, the court will considerwhether there are sufficient grounds for bankruptcy. If the debtorfiles a petition for bankruptcy, the court will generally require a lowerstandard of proof than if the petition was lodged by a creditor.

Under Japanese law, the filing of the petition for bankruptcy itselfdoes not cause an automatic stay to be imposed. Therefore, thereis a risk period between the time of filing the bankruptcy petitionand the making of the commencement order. In order to protectthe debtor’s estate, the petitioner usually files an injunction at thesame time that it files the bankruptcy petition to avoid the situationwhere creditors rush to the debtor to demand payment, obtainsecurity, or repossess goods by cancelling sales and so forth. Theinjunction typically contains a prohibition against the disposition ofthe debtor’s assets, and a prohibition against collection andpayment of pre-injunction debts. Payments of pre-injunction debtsare null and void if the creditor was aware of the injunction at thetime of the payment. Therefore, the debtor should give notice of

the injunction to all creditors that are likely to make final efforts tocollect or improve the position of their claims.

With the commencement of a bankruptcy order, a bankruptcytrustee (hasan kanzainin) is appointed by the court, usually fromamong practising attorneys. The trustee has the power tomanage and dispose of the property in the bankrupt estate(hasan zaidan). The bankruptcy trustee’s role is to ensure fairtreatment of creditors including the right of avoidance, the rightto set aside and the right to set-off. Assets that belong to thebankrupt estate will be liquidated by the bankruptcy trustee withthe permission of the court and distributed to creditors.

Right of avoidance (hinin ken) – The bankruptcy trustee mayavoid or set aside the payment of debts, the creation of asecurity interest, the sale of a debtor’s property for unfairly lowprices, and other dubious transactions made after the debtorwas in financial difficulty.

Right to set aside (betsujo ken) – Secured creditors retain theright to enforce their security interest without complying with thegeneral procedures of the bankrupt estate. It is not unusual,however, for the bankruptcy trustee and a secured creditor toco-operate in order to sell secured assets voluntarily. In addition,a new system was introduced in 2005 allowing the bankruptcytrustee to petition the court to discharge such security intereststhrough the voluntary sale of secured assets when it wouldbenefit the interest of creditors’ generally and would notunreasonably harm the affected secured creditors’ interests. Thesecured creditor may recover its claim from the sale proceeds ofthe secured assets paid to the court in accordance with thepriority of the security interest, but a portion of the proceeds ofthe sale may be paid to the bankrupt estate at the request of the



bankruptcy trustee. The secured creditor may challenge thepetition to dispose of the security interest, and is entitled either:(i) to declare that the creditor itself or some other party willpurchase the property for an amount resulting in proceeds of105% or more; or (ii) to foreclose the security interest.

Right to set-off (sousai ken) – A creditor who also owes a debtto the debtor at the time of commencement of the bankruptcyproceedings is entitled to set-off such debt against its claim.However, debts owed to the debtor by a creditor and claimsobtained by a creditor against the debtor arising aftercommencement of the bankruptcy proceedings may not be set-off.

Priority of ClaimsThe claims in bankruptcy proceedings are broadly prioritisedas follows:

1. Superior obligations (zaidan saiken) – superior obligationshave priority over claims of unsecured creditors, and includethe costs and expenses incurred in the course of theadministration of the bankrupt estate, pre-commencementorder taxes, unpaid salary that accrued within three monthsprior to the commencement of bankruptcy and severancepay equivalent to three months’ salary;

2. Priority bankruptcy claims (yusenteki hasan saiken) – unpaidsalary, bonus and severance pay;

3. Ordinary bankruptcy claims (ippan hasan saiken) – tradeclaims and other claims without priority;

4. Subordinated bankruptcy claims (retsugoteki hasan saiken) –interest, default interest and penalties that accrue after thebankruptcy proceedings commence; and

5. Contractually subordinated bankruptcy claims (yakujo retsugohasan saiken) – claims which were agreed to be subordinatedto the above subordinated bankruptcy claims.

After the creditors have submitted their claims, they will beexamined by the bankruptcy trustee and other creditors. At theclaims hearing, which is held by the court when necessary, thebankruptcy trustee will admit or reject certain claims. The hearingwill then continue with respect to claims that are not admitted orrejected. Creditors may also raise objections to other creditors’claims. Creditors whose claims are rejected may appeal againstthe bankruptcy trustee’s decision.

The directors who have breached the obligation to act as “goodmanagers” or their fiduciary duty shall be jointly and severallyliable to indemnify the company for any loss which may beincurred by the company. The bankruptcy trustee may petition forthe assessment of a compensation claim which is a specialprocedure, or bring a standard lawsuit to seek compensation fordamage caused by a director.

The court may hold the creditors’ meeting at its discretion. At thecreditors’ meeting, the bankruptcy trustee will report to thecreditors the causes and background of the bankruptcy, the pastand present status of the debtor and the estate, and othermatters. Creditors may appoint at least three and up to tenrepresentatives to form a creditors’ committee (saikensha iinkai) torepresent the creditors’ views in court or to the bankruptcy trustee.

Finally, when the assets of the bankrupt estate have beenliquidated into a sufficient amount of cash for distribution, thecreditors will be paid according to their respective priorities. Asecured creditor, who retains access to the secured assets, is



excluded from the distribution unless it proves that the claimamount became unsecured after the bankruptcy proceedingscommenced, or the amount of deficiency after foreclosure on thesecured assets.

Special liquidation (tokubetsu seisan)This procedure is only available for KKs. It is quicker than abankruptcy proceeding and can avoid a company being declaredbankrupt. It also distributes the company’s remaining assets to itscreditors and shareholders in an expeditious and flexible manner.This procedure is often used by the parent company to liquidateloss-making subsidiaries.

In order for special liquidation to take place, the corporation mustfirst pass a resolution for the dissolution (kaisan) of the corporationat a shareholders’ meeting, where the majority of issued andoutstanding shares are represented. The resolution must besupported by two-thirds (2/3) or more votes of the sharesrepresented. Upon the passing of the resolution for dissolution,the liquidation proceedings (seisan tetsuzuki) will commence andthe corporation will appoint a liquidator (seisan nin). The liquidatoris required to give a public announcement, without delay,requesting creditors report their respective claims to the liquidatorwithin a given period (at least two months). The same request willbe mailed to creditors already known to the corporation.

If it is suspected that the company’s liabilities exceed its assets,the liquidator is required to file with the court a petition for specialliquidation. Creditors, statutory auditors and shareholders mayalso petition for a special liquidation. An injunction may also berequested by the petitioner at the same time in order to preservethe assets during the interim period between the filing of thepetition and the issuance of a commencement order.

The court shall make an order to commence special liquidation if:(i) there are circumstances that would seriously impede theliquidation of the corporation (such as a large number of creditors orextremely complex rights and obligations involved), or there is asuspicion that liabilities exceed assets; and (ii) there is a possibility ofthe successful termination of the proceedings through confirmationof the plan for distribution or independent settlement with all thecreditors. Under the special liquidation procedure, the following aresuspended and no further proceedings can be commenced:(i) compulsory execution proceedings and orders; (ii) provisionalinjunctions; and (iii) provisional attachment orders. The court mayalso suspend any bankruptcy proceedings which may be pending.

Upon issuance of the commencement order, the liquidatorbecomes the special liquidator who will be responsible forconducting the special liquidation procedure for the benefit of thecompany, creditors and shareholders. Upon issuance of thecommencement order, the special liquidator disposes of thecorporation’s assets and collects its receivables, and submits tothe court an agreement (kyotei) for distribution of the estate tocreditors and shareholders.

Secured creditors have the right to enforce their securityinterests outside the special liquidation proceedings (betsujoken). There is no proof of claim proceedings, and the right ofavoidance does not apply. Creditors’ right to set off debtsobtained after the commencement of the proceedings, whichare provided under the Civil Code (min pou) of Japan, may berestricted under this procedure.

Within one to two months after the commencement order hasbeen issued, a creditors’ meeting is convened for the purpose ofexplaining the company’s current status and the procedures for



special liquidation. The special liquidator may submit anagreement to the creditors’ meeting or settle with each creditor toliquidate the corporation’s assets and distribute them to creditorsequally according to their respective priorities. The agreement isrequired to give all creditors substantially equal treatment. Therequirement for distribution according to priorities is applied moreflexibly than in a bankruptcy scenario. Secured creditors can jointhe unsecured creditors, or, in principle, enforce their securityinterest outside the special liquidation proceedings. Theagreement should also treat the remaining liabilities as forgiven sothat the balance sheet of the corporation shows no deficit.

The agreement must be approved at a creditors’ meeting by themajority of creditors present and by creditors with aggregateclaims of two-thirds (2/3) or more of the total debt owed by thecorporation. If the agreement is not approved, then thebankruptcy proceedings will commence at the court’s discretion.

Once the agreement is approved by the prescribed majority in acreditors’ meeting and by the court, it becomes binding on allunsecured and consenting secured creditors. In principle, theagreement can treat certain creditors preferentially, but inpractice, this will make it difficult for the agreement to beapproved. If the agreement is not approved by creditors, thecourt may declare the corporation bankrupt. Bankruptcyprocedures will then apply.

When the agreement is fully performed, the corporation’sobligations under independent settlements with creditors havebeen discharged, or when the liabilities of the corporation nolonger exceed the value of its assets, the court will ordertermination of the proceedings. When the agreement has beenfully performed, the corporation ceases to exist.

Corporate reorganisation (kaisha kosei)The corporate reorganisation process is only available to KKs andto foreign companies of a similar nature with a business office inJapan, where (a) a company is unable to pay its debts as they falldue without causing serious difficulties in continuing business or(b) events may occur that could cause bankruptcy. The corporatereorganisation procedures apply to all company assets locatedinside and outside Japan (in the case of assets outside Japan,the recognition of Japanese insolvency proceedings in a foreigncountry would be required). This procedure is usually onlysuitable for large companies due to the high cost and length oftime required for its implementation. Accordingly, it is lessfrequently utilised than the civil rehabilitation procedure.

The following parties can make an application to the court forcorporate reorganisation: (i) the company itself; (ii) (in the case of(a) above only) creditors (whether secured or unsecured) having aclaim equal to not less than one-tenth (1/10) of the amount of theshare capital of the debtor; or (iii) (in the case of (a) above only)shareholders with 10% or more voting rights of the company’svoting shares.

After an application has been made, the court will considerwhether it is apparent that a reorganisation plan for thecontinuation of the business is unlikely to be prepared, adoptedor approved. As corporate reorganisation is mainly used forlarge corporations, the investigation to determine whether acompany can be reorganised takes from approximately fourweeks to several months. In the meantime, the court willappoint a preservative administrator (hozen kanrinin) to managethe business and assets of the debtor. The preservativeadministrator has certain rights of avoidance and can elect toterminate existing contracts. In addition, the court usually



issues certain orders (hozen kanri meirei) to preserve the assetsof the corporation.

If the court finds probable grounds that the statutoryrequirements for the rehabilitation of the company are satisfied, itmay order the commencement of the reorganisation. The courttypically appoints two trustees (kanzainin): one lawyer and onebusinessperson. The trustees are vested with the exclusive rightsto manage and control the business and assets of the debtor.The trustees may elect to rescind contracts which remain to beperformed or request performance by the other party in return fordue performance by the corporation.

Secured creditors may enforce their security interest only inaccordance with the reorganisation proceedings andreorganisation plan. However, certain preferential claims (kyoekisaiken) may be paid outside the reorganisation proceedings andhave priority over other creditors. Rights of set-off (sousai ken)can be exercised until the deadline for submission of creditors’claims, after which set-off is prohibited.

The trustees prepare a reorganisation plan and submit it to the courtfor approval. However, the company, shareholders and creditorswho filed a claim may also submit plans. The reorganisation planmay include rescheduling of the company’s repayments; reduction orloss of shareholders’ capital and a list of secured and unsecuredcreditors waiving part of their claims. Classes of creditors andshareholders vote on the reorganisation plan in a creditors’ meeting,and each class has different majority requirements as follows:

(a) Unsecured CreditorsThe reorganisation plan shall be approved by unsecured creditorshaving voting rights (measured by the amount of the claim) equal

to more than a half (1/2) of the overall voting rights of theunsecured creditors.

(b) Secured creditors(i) any grace period in respect of the payment of secured claims

shall be approved by secured creditors having voting rightsnot less than two-thirds (2/3) of the overall voting rights of thesecured creditors;

(ii) the release of any security interests shall be approved bysecured creditors having voting rights not less thanthree-quarters (3/4) of the overall voting rights of the securedcreditors; and

(iii) cessation of the entire business of the debtor shall be approvedby secured creditors having voting rights not less than nine-tenths (9/10) of the overall voting rights of the secured creditors.

For the purposes of the paragraphs (i) through (iii) above, thevoting entitlement of a secured creditor is the lower x of (x) theamount of that secured creditor’s claim or (y) the market value ofthe assets securing that claim as of the date of commencementof the proceedings.

(c) ShareholdersThe reorganisation plan shall be approved by shareholdershaving rights equal to more than a half (1/2) of the total votingrights of the shareholders.

Once the plan is approved by creditors, the court will also decidewhether or not to approve the plan. If no plan is approved, thecourt may declare the company bankrupt or allow the companyto apply for civil rehabilitation. Bankruptcy or civil rehabilitationprocedures will then apply.



Civil rehabilitation (minji saisei)Civil rehabilitation is Japan’s only debtor-in-possessionreorganisation procedure and is broadly similar to the US Chapter11 proceedings. All types of companies (including foreigncompanies with a place of business in Japan) and individuals(including foreigners with connections with Japan) are eligible. Thecivil rehabilitation procedure was introduced primarily for small andmedium-sized companies, since the corporate reorganisationprocedure is available to larger companies. However, a significantnumber of large companies have also used the civil rehabilitationprocedure for the reasons outlined above.

If a company (a) considers that events may occur which couldcause bankruptcy, or (b) appears to be unable, without causingmaterial difficulty to its ongoing business, to pay its debts as theyfall due, the company itself or (in the case of (a) only) thecreditors may make an application to the court for civilrehabilitation. There is no minimum requirement with regard tothe amount of the creditors’ claim.

Filing for civil rehabilitation does not have the effect of anautomatic stay. In order to preserve the assets of the debtorduring the period between the filing of a petition for the civilrehabilitation proceedings and the commencement of theproceedings the debtor, or a creditor, may file a petition for aninjunction. The court may also issue an injunction on its ownaccord, even without any petition for an injunction being filed.

Meanwhile, the court usually appoints a supervisor (kantoku iin)who supervises the rehabilitation process and considers thefinancial and business status of the company to assist the courtin determining whether it is capable of rehabilitation. Once thecourt is persuaded that the requirements for commencement of

civil rehabilitation proceedings have been met, the court will orderthe commencement of the proceedings unless certain eventsexist which persuade the court otherwise (e.g., it is clear that acivil rehabilitation plan cannot be formulated or approved bycreditors, confirmed by the court or where the filing was made forunfair purposes or otherwise lacked good faith). After thecommencement, provisional injunctions, all compulsory executionproceedings and orders, provisional attachments and otherspecified procedures are suspended.

In civil rehabilitation proceedings, the debtor may continue tooperate its business even after commencement of proceedings,but the usual practice is for a supervisor to be appointed. Only asupervisor with specific avoidance authority or a trustee canexercise rights of avoidance. The supervisor may also rescindbilateral contracts or request performance by the other party of itsobligations in return for due performance by the company.However, if the court considers that the management of thedebtor’s assets is inappropriate or that it is necessary for therehabilitation of the debtor’s business, the court may appoint aprovisional administrator (chosa iin) or trustee (kanzainin) tomanage the business and assets in certain circumstances (and thedebtor will cease the day-to-day management of the company).

Right to set aside (betsujo ken) – Secured creditors have, inprinciple, the right to enforce their security interest outside theproceedings. However, the court has the power to discharge asecurity interest where the secured assets are indispensable forthe continuation of the debtor’s business. In such a case, thecompany may be free of the secured rights by depositing anamount of money equivalent to the fair value of the collateralisedassets with the court, if it finds that the assets are necessary torehabilitate the company.



Right to set-off (sousai ken) – Creditors’ rights to set off debtscreated in good faith, which are provided under the Civil Code ofJapan, may be restricted under this procedure.

The debtor and its creditors may propose rehabilitation plans. Theplan may include: (i) rescheduling the company’s repayments;(ii) reduction or loss of shareholders’ capital; and (iii) a list of securedand unsecured creditors prepared to waive part of their claims.

For the plan to be approved, the consent of one-half (1/2) ormore in number and value of creditors present or represented atthe creditors’ meeting, or voting by ballot, is required. Once theplan is approved by creditors and the court, the rights ofunsecured creditors are altered according to the plan. If a plancannot be approved or an approved plan turns out not to befeasible during the rehabilitation process, the court may declarethe company bankrupt and bankruptcy proceedings will begin.

The Civil Rehabilitation Law has been effective since 1 April 2000. Itgenerally conforms to recent international practice to allowextra-territorial authority for liquidators or bankruptcy administrators.The law defines the rights of foreign liquidators or bankruptcyadministrators who are entitled to make an application to the courtfor civil rehabilitation, attend creditors’ meetings, and to expresstheir views at court and/or creditor meetings.

Other proceduresSpecial mediation (tokutei chotei)Special mediation aims to provide debt relief to potentiallyinsolvent debtors through civil mediation (minji chotei)proceedings to achieve an agreement between the debtor andeach individual creditor, under the court’s supervision. This ismainly used by individuals and small companies.

Lender liabilityThere is no statute specifically providing for lender’s liability.Although the lender’s liability issue has been discussed as ageneral law matter, e.g. tort, there is presently no establishedtheory on this point.

GuaranteesThere is no law against the provision of financial assistance inJapan. A borrower may receive an upstream guarantee from itsJapanese subsidiaries if the Japanese subsidiaries are direct orindirect wholly-owned subsidiaries of the borrower. There is alsono restriction on a downstream guarantee, provided there issome corporate benefit for the parent company.

New money lendingIf a preservation order has been issued by the court after anapplication for corporate reorganisation or civil rehabilitationproceedings has been made, the debtor company cannotborrow working capital or other money unless the court grants aspecial exemption to do so. Debtor in possession (DIP) finance isprovided by financial institutions upon obtaining an exemptionfrom the court. Furthermore, for the purpose of securing DIPfinance, debts arising under DIP finance are given priority overthe debts of other unsecured creditors. For corporatereorganisation proceedings, this also applies to securedcreditors. For civil rehabilitation proceedings, however, debtsunder DIP finance do not have priority over secured creditors inrespect of the secured assets.

Cross-border insolvencyAs part of the comprehensive reform of Japanese insolvency law, anew legal framework exists with regard to cross-border insolvency,



modelled on the UNCITRAL Model Law on Cross-BorderInsolvency. The new legal framework has been established by theenactment of, amongst others, the Law concerning Recognitionand Aid for Foreign Insolvency Proceedings (“LRAF”) and the Lawto Amend a Portion of the Civil Rehabilitation Law (“LACR”). Theselaws came into effect in April 2001.

Under the LRAF, a foreign trustee who has the power to managethe business and assets of the debtor in any foreign jurisdiction(gaikoku kanzainin) is not granted any right or privilege by his/hermerely obtaining recognition of the foreign proceedings in Japan.The foreign trustee must file a petition for appropriate assistanceon a case-by-case basis, and obtain a court order for suchassistance. The court will hand down a recognition order if it isconvinced that the foreign insolvency proceedings meet thenecessary requirements for assistance in Japan (e.g. thedebtor’s address, residence, or business or other office exists inthe country where the relevant foreign insolvency proceedingsare pending, the commencement of the foreign insolvencyproceedings have been formally ordered and where it is clearthat assistance is necessary under LRAF for the foreigninsolvency proceedings).

Pursuant to a recognition order, various orders will be handeddown according to necessity. Examples of orders are: (i) atemporary suspension order against a compulsory executionproceeding upon judgment; (ii) provisional attachment or otherinjunction, lawsuit or administrative proceeding, with regard tothe debtor’s assets in Japan; (iii) an injunction prohibiting thedebtor from disposing of assets and making payments; and(iv) other orders that the court deems appropriate.

The court may order the foreign trustee is required to obtain thecourt’s approval for any disposition or outbound delivery of thedebtor’s assets located within Japan in order to protect creditorsin Japan.

A foreign trustee will lose its power to manage the business andassets of the debtor where the foreign insolvency proceedings areterminated or where the requirements for recognition of foreigninsolvency proceedings are no longer met.

As a result of the reform of Japanese insolvency laws, bankruptcyproceedings and the authority of a provisional trustee and trusteenow extend to the debtor’s assets outside Japan.

The insolvency law reforms also implement the “hotchpot rule” –any recovery of a creditor, obtained by the exercise of its rights,from the debtor’s assets located outside Japan shall be creditedagainst payment under the proceedings in Japan.

Under the LACR, the Japanese court has jurisdiction over aninsolvency proceeding, so long as the debtor has its address,offices, business or assets within Japan. The LACR has alsoabandoned the mutuality principle. The revised bankruptcy lawprovides equal treatment to foreign parties regardless of whetherthe foreign party’s home country provides reciprocal recognitionof insolvency proceedings initiated in Japan.




Korea


IntroductionThis section is designed to provide a general outline of the maincorporate insolvency procedures available in Korea. Insolvencyproceedings in Korea are governed by the Debtor Rehabilitationand Bankruptcy Act (“DRBA”), which came into force inApril 2006. The DRBA is also referred to as the “ConsolidatedInsolvency Act”; because it consolidates the CorporateReorganization Act, the Composition Act, the Bankruptcy Actand the Act on the Rehabilitation of Individual Debtors.

The DRBA provides for two corporate insolvency procedures,namely rehabilitation and bankruptcy. Rehabilitation is designedto rehabilitate the debtor with creditor consent by providing debtreductions and/or grace periods for the payment of debts. Thisoccurs by operation of protective measures under thesupervision of the court. Bankruptcy, on the other hand, seeks toregulate the liquidation of the debtor and the fair distribution ofthe debtor’s liquidated assets.

We also briefly consider out-of-court insolvency procedures;namely the private workout arrangements for Korean financial

institutions, and the statutory workout arrangement under theCorporate Restructuring Promotion Act (“CRPA”). The ambit ofthis note is limited to insolvency procedures applicable tocorporate entities, and does not extend to the insolvencyof individuals.

RehabilitationThe rehabilitation procedure under the DRBA allows forstreamlined and expeditious corporate restructuring under courtsupervision. The main steps under the rehabilitation proceedingare discussed below.

Filing of applicationAn application for corporate rehabilitation may be filed in thefollowing circumstances:

(1) a company is unable to pay its debts when they fall due (unlessrestructuring of debt is not possible, in which case, it may bemore appropriate for the company to go into bankruptcy);

(2) there is a legitimate fear that a company will be insolvent(suspension of payment is deemed as insolvency); or

(3) there is a legitimate fear that the total debts of the companywill exceed its total assets.

Companies typically file for corporate rehabilitation on a voluntarybasis. Creditors with claims equal to at least 10% of the debtor’stotal paid-in capital, or shareholders owning at least 10% of thetotal issued and outstanding shares are also permitted to file forcorporate rehabilitation.

KoreaContributed by Bae, Kim & Lee LLC

Key Elements:n Rehabilitation procedure focuses on company rescue

n Moratorium available

n Onerous treatment of related transactions

n Management may retain degree of control in rehabilitation

n Out of court procedures available


Eui Jong (EJ) Chung, Partner, Bo Youl Hur, Partner, Annie Eunah Lee, Senior Foreign Legal Consultant133 Teheran-ro, Gangnam-guSeoul 135-723Republic of KoreaT: +82 2 3404 0139F: +82 2 3404 0001www.bkl.co.kr


Stay ordersThe filing for corporate rehabilitation in Korea does not itselftrigger the official commencement of corporate rehabilitationproceedings. The DRBA provides for an interim period betweenthe filing of the application and the official commencement of theproceedings, where the company’s assets are “preserved” forrehabilitation and distribution under the rehabilitation plan.

The court must decide whether to grant a stay order withinseven days of filing the application. This order generally prohibitsthe debtor from taking certain steps or actions without theapproval of the court, including repaying debts, disposing ofproperty, or obtaining new loans. In certain exceptional cases,the court will appoint one or more interim receiver(s) to managethe debtor during the preservation period.

The commencement order is issued within one month of the filingof an application for rehabilitation proceedings. In practice,therefore, in the absence of any issue with the integrity of thedebtor’s existing management, there is generally no need toappoint an interim receiver.

The court may also, at its discretion or by application of aninterested party, issue a comprehensive stay order. This will barcreditors from enforcing their claims in respect of the debtor’sassets through compulsory execution, preliminary attachment orpreliminary injunction. This order will become effective uponservice of the order on the debtor.

Official commencement of rehabilitation proceedingsThe court is required to decide whether to commence rehabilitationproceedings within one month from the date of filing for corporaterehabilitation. On the commencement of corporate rehabilitation, thecourt will appoint one or more receivers, or replace any interimreceiver with one or more permanent receivers. Authority to managethe business operations and assets of the debtor shall vest in thepermanent receiver, subject only to the court’s supervision.

Generally, the representative directors of the company areappointed as receivers in the absence of any “cause forinsolvency” attributable to such representative directors. A “causefor insolvency” generally does not stem from poor commercialdecisions. Should a poor commercial decision, however, madeby a representative director cause the financial condition of thedebtor to deteriorate significantly, the court may decide not toappoint such representative director as the receiver.

The court will select the receiver from a pool of qualified candidates(comprised of professional business managers and officers) whohave undertaken special training recognised by the court office.Since a creditor is an interested party, the court will generally avoidthe appointment of a candidate recommended by a creditor. Thecourt may also abstain from the decision to appoint a receiver, andinstead permit the representative director of the debtor toundertake the role. In practice, Korean courts tend to avoid theappointment of a receiver for large corporations. This leads toincreased corporate autonomy for the debtor companies that aresubject to rehabilitation proceedings, because shareholders anddirectors may at any time resolve to reallocate the role.



Examination of financial statusOn the commencement of corporate rehabilitation, the court willappoint an examiner (normally an accounting firm or a creditrating agency) to examine and submit a report on, amongst othermatters, the debtor’s liquidation value and the going-concernvalue of its business, as well as the status of total assets and itsdebt repayment capability.

If the court determines (based primarily on the findings of theexaminer’s report) that the going-concern value of the business ishigher than its liquidation value, it will order the receiver and allowother interested parties to submit a rehabilitation plan. Interestedparties include any legal person that has reported to the court;such as the debtor itself, its shareholders, and its secured andunsecured pre-rehabilitation creditors. The examiner will in turnconduct a feasibility review on the draft rehabilitation plan, andreport whether the plan will guarantee the liquidation value in theinterest of the creditors. If it finds, based on the examiner’s reports,that the going-concern value is less than the liquidation value ofthe business of the debtor, by application of the debtor or anyinterested party above, the court will order the termination of thecorporate rehabilitation proceedings and may subsequently orderthe commencement of liquidation proceedings against the debtor.

Filing of claims and examination Any creditor, secured or unsecured, that seeks repayment mustfile a report and proof of its claim with the court within a fixedtime period. The DRBA provides that the receiver shall make andsubmit a list of the secured and unsecured pre-rehabilitationcreditors. If a creditor is listed, the creditor shall be regarded ashaving reported its claims. The date of submission must be

scheduled by the receiver between two weeks to two monthsfrom the official commencement date. Failure to report claimswithin the specified period will generally discharge the debtorfrom its obligations in this respect. The creditor must file allinformation and documents giving rise to the underlying claim ina court-prescribed form. This includes the claim amount, whetherthe claim is secured, whether legal proceedings have beencommenced in relation to such claim, whether there is a legalpreferential right (such as a tax claim) granted in respect of thecreditor’s claim, and any other material information.

Interested parties, such as the receiver, debtor and othercreditors, may examine and object to each claim filed during theprescribed period. The examination will only look to whether theclaim exists. Other matters, such as the seniority of the claim (orwhether a claim should be equitably subordinated), are subject tolater review. If a claim is denied, it will be excluded from therehabilitation plan, unless the claimant successfully challengesthe denial through “confirmatory” proceedings.

As a general rule, any creditor whose claim against the debtorarose prior to the commencement of rehabilitation is unable toreceive distributions on its claim, unless the distribution isprovided for under the rehabilitation plan adopted at the meetingof interested parties and thereafter approved by the court.

Submission of the draft rehabilitation planThe corporate rehabilitation plan will outline all modifications ofthe rights of creditors or shareholders, and also provide for anytransfer or lease of the debtor’s business or property and anyother matter necessary for the debtor’s rehabilitation.



Restructuring of a company’s debts may involve substantiallyreducing the principal owing and/or (in some cases completelyexempting) interest payments. The court will order the receiver tosubmit a draft rehabilitation plan. Other interested parties,however, may also prepare and submit a draft rehabilitation planto the court within the specified date. This includes the debtor,secured creditors, unsecured creditors, and shareholders. Therehave recently been instances where the creditor group of adebtor has prepared its own version of the draft rehabilitationplan and submitted it to the court.

It is also theoretically possible to submit a pre-packagedrehabilitation plan when applying for rehabilitation proceedings.This is rather uncommon, however, as it assumes consensusamong the many classes of creditors. From a legal standpoint, amajority of the total creditors must consent to submission of thepre-packaged plan. If the plan is filed, the entire process up untilthe approval of the rehabilitation plan can be reduced by up totwo months.

Interested parties’ meetingsThe rehabilitation plan is formally determined and approved overthe course of three or more statutory meetings of interestedparties. The first meeting is convened mainly to present thereceiver’s report and to provide the interested parties with anopportunity to express their opinion on the administration policyof the debtor. After the first stakeholders’ meeting, the court willorder the receiver to submit a draft rehabilitation plan.

The second meeting is held for the purpose of deliberating on thedraft rehabilitation plan, which the receiver must prepare and file

(in conjunction with the debtor’s major financial institutionalcreditors) within four months from the expiration date of theclaims filing period.

The third meeting is convened to vote on a resolution forapproval of the draft rehabilitation plan. In the absence of specialcircumstances, the court often holds the second and thirdmeetings on the same date.

The draft rehabilitation plan is subject to approval by the requisiteamount (rather than number) of each class of shareholders andsecured and unsecured pre-rehabilitation creditors. Theshareholders, however, have voting rights only when the totalvalue of the assets of the debtor exceed the total value of thedebts. The voting requirement for the adoption of a rehabilitationplan by the interested parties is approval by creditors constitutingthree-quarters of the secured pre-rehabilitation claims, two-thirdsof unsecured pre-rehabilitation claims, and a majority vote of theshareholders present at the meeting. Creditors belonging to thesame class will vote together. To the extent that the value of thesecured assets is insufficient to satisfy the repayment of claims,the excess amount of loan or debt claim over the value of thesecured assets will be treated as an unsecured claim. The valueof the secured assets will be determined by the examiner afterthe commencement of the rehabilitation proceedings.

Court approval of the rehabilitation planOnce the interested parties have approved a draft rehabilitationplan, it will be submitted to the court for approval. In making itsdetermination, the court will analyse whether the plan meets all ofthe legal requirements under the DRBA and is fair to the



interested parties. The court’s decision in the majority of cases willbe made on the date of the third meeting of interested parties,although the procedure may sometimes last until approximatelyone week after the third meeting of interested parties. Therehabilitation plan takes immediate effect on court approval.

Even where the interested parties have not approved therehabilitation plan, the court at its discretion may order a cramdown and adopt the rehabilitation plan over the objection ofsome creditor classes.

Subordination of claimsThe DRBA provides an exception to the general rule that a groupof creditors belonging to the same class must be treated equally.This applies to a rehabilitation plan where the transactions involvespecially related persons; namely where a loan is made by orguarantee is provided by the debtor to a person with whom ithas a special relationship, or where a guarantee is provided bythat person to the debtor itself.

The Enforcement Decree to the DRBA provides that if the debtoris a corporate entity, its specially related persons include:

(a) its officers;

(b) its affiliated companies (including the associated officers)as defined under the Monopoly Regulation and Fair TradeAct (“MRFTA”);

(c) certain prescribed individuals; and

(d) any company in which the prescribed individual, alone ortogether with the companies and/or individuals referred to in

(a), (b) and (c) above, holds at least a 30% equity share, orcontrols the management, for instance, through theappointment of officers.

Prescribed individuals include persons who, alone or together withtheir relatives and/or the companies’ officers, own 30% or moreshares in the debtor. It also extends to these individuals’ familymembers, and the appointed officers of companies (other thandirectly affiliated companies) that fall under the individual’s control.

Under the MRFTA, a subsidiary will be deemed as an affiliatedcompany of the parent if, alone or together with its relatedpersons, it has:

(a) 30% or more shares in its subsidiary;

(b) the power to elect a representative director or appoint at least50% of the board members; and

(c) influence over major management or operational matters ofits subsidiary, such as changing the corporate structure ormaking new investments.

BankruptcyProceedingsBankruptcy is related to the liquidation of an insolvent company.An application for bankruptcy may be made either by the debtoror its creditors. For a creditor to apply, it must prove theexistence of a claim against the debtor with supporting evidence.Unlike rehabilitation, which looks to the going concern value ofthe debtor, the present value of the debtor’s assets is the mostrelevant factor in the court’s decision whether to adjudicate the



debtor bankrupt. In bankruptcy, the majority of the debtor’sassets are transferred to the bankrupt estate, and any proceedsare distributed to the creditors in accordance with the priority ofthe claim. Once bankruptcy proceedings have been commenced,creditors must report their claims to the bankruptcy court, andtheir recovery is limited to the proceeds from the sale of theassets of the bankrupt corporation.

Priority of ClaimsCreditors’ claims generally rank as follows:

Separation claims representing pre-bankruptcysecurity interests A creditor with a secured claim, such as a lien, pledge ormortgage, or a lessee of real property with a perfected securityright, may exercise its rights outside bankruptcy. Furthermore, alessee of residential or commercial property with a perfected rightto the security deposit, where such security deposit is below thelegal threshold, holds a preferential right of payment over otherholders of a separation claim up to the amount of the securitydeposit. If the proceeds from the enforcement of the collateralare insufficient to satisfy the secured creditor’s claim, it may claimthe remainder as an unsecured creditor in the bankruptcyproceedings.

Common benefit claim A common benefit claim covers administrative expenses thatserve the common benefit of all parties to the bankruptcyproceedings. It generally includes the costs related to themanagement, disposition and distribution of the bankruptcyestate and generally covers claims that arise after the declaration

of bankruptcy. Certain claims, however, such as tax, wages orseverance claims are recognised as a common benefit claim,regardless of whether they arise before or after the declaration ofbankruptcy, for reasons of public policy. A common benefit claimmay be paid from time to time outside the bankruptcyproceedings whenever cash is available for distribution, and itranks senior to an unsecured bankruptcy claim.

Unsecured bankruptcy claimUnsecured bankruptcy claims relate to events that occur prior tothe declaration of bankruptcy that are not secured by collateral.Such claims may be repaid during the bankruptcy proceedings.They comprise:

(a) bankruptcy claims with preferential rights;

(b) general bankruptcy claims; and

(c) subordinated bankruptcy claims.

Preferential bankruptcy claims include, without limitation, thoseprescribed in the Korean Civil Code, the Korean CommercialCode, the Insurance Act and Mutual Savings Bank Act, andthese claims have priority over other general bankruptcy claims.

Subordinated bankruptcy claims are those claims prescribed inthe DRBA. These include interest accruing after the declaration ofbankruptcy, costs for participation in the bankruptcyproceedings, penalties and fines, or claims stated to besubordinated to other claims by agreement between the debtorand the creditor. Subordinated bankruptcy claims may be repaidonly after full repayment of other unsecured bankruptcy claims.



Voidable transactionsUnder the DRBA, a rehabilitation receiver or a bankruptcyadministrator may avoid certain actions of the debtor companywhich constitute a preference. Actions subject to claw-back onthe grounds of preference include:

(a) an act performed by the debtor with knowledge that it willharm the interests of unsecured or secured pre-rehabilitationcreditors (but it is not subject to claw-back if the beneficiaryof the act did not have knowledge that the act caused harmto the interests of the unsecured or secured pre-rehabilitationcreditor at the time of performance of the act);

(b) the provision of security or the repayment of debt obligationsby the debtor that cause harm to the interests of unsecured orsecured pre-rehabilitation creditors after the debtor’s paymentobligations have been suspended or the filing of an applicationfor commencement of rehabilitation proceedings or bankruptcyproceedings (provided that the provision of security or therepayment of debt obligations is voided only if the beneficiaryof the security or repayment was aware of either (a) thepayment suspension or the filing of an application, or (b) thefact that such act could harm any unsecured or securedpre-rehabilitation creditor at the time of performance of suchact (in connection with the proviso, knowledge is imputedwhere the beneficiary is a “specially related person”));

(c) the provision of security or the repayment of debt obligationsby the debtor where the debtor is not under an obligation toprovide security or repay debt obligations (including where thedebtor repays prior to the due date), which is performed within60 days before or after the debtor’s payment obligations have

been suspended or the filing of an application for thecommencement of rehabilitation proceedings or bankruptcyproceedings (provided that such act is not voided if thecreditor was not aware of the fact that such act harms otherunsecured or secured pre-rehabilitation creditors (inconnection with the proviso, knowledge is imputed in case thebeneficiary is a “specially related person” and 60 days isextended to one year for such “specially related person”)); and

(d) any gratuitous act or act for valuable consideration that maybe deemed identical to a gratuitous act, which is performedby the debtor before or after six months from the date thedebtor’s payment obligations have been suspended(six months is extended to one year in case the beneficiary isa “specially related person”) or the filing of an application forthe commencement of rehabilitation proceedings orbankruptcy proceedings.

Specially related personsUnder the DRBA, unlike independent third parties, speciallyrelated persons are presumed to have knowledge that the debtorcompany has:

n applied for rehabilitation or bankruptcy; and

n committed actions that cause harm to creditors.

Furthermore, the look back period for the provision of collateralor release from indebtedness increases from 60 days to 1 year(from (a) the suspension of payment, or (b) the filing forrehabilitation or bankruptcy) for a specially related person of thedebtor company.



Out-of-court proceedings The most commonly adopted out-of-court restructuring forcorporate entities are:

n private workout; and

n joint management under the CRPA.

Private workoutA private workout is generally only available when there are fewcreditors. As a voluntary process, private workouts allow forgreater flexibility and autonomy in rehabilitating the debtorcompany. It may, however, lack enforceability in comparison tocourt-administered proceedings as some creditors may opt notto participate in the process. In a private workout, a debtrescheduling plan is binding only on those creditors thatindividually agree to the plan. If the debtor company isrestructured by way of private work out, any non-participatingcreditors continue to retain their full claim amount and arerequired to be repaid in accordance with their existing contractualterms originally entered into with the debtor company.

Corporate Restructuring Promotion ActThe CRPA was adopted to address the foregoing problem ofsome creditors benefiting from a private workout by notparticipating. While the debtor has the right to apply for aworkout under the CRPA, it is up to the council of creditorfinancial institutions to accept such an application. Under theCRPA, all major creditor banks or the committee of creditorsmust belong to the council of creditor financial institutions. TheCRPA affords the council of creditor financial institutions of an“insolvency-symptomatic” company (the

“Insolvency-Symptomatic Company”) the right to approve one ofthe procedures for supervision or monitoring of the debtorcompany if it determines that such company is in significantfinancial difficulties. The supervision available under the CRPAmay be one of (i) joint supervision by creditor institutions, (ii) jointsupervision by creditor banks, or (iii) supervision by primarycorrespondent bank. If the primary correspondent bankdistributes a notice to convene the committee of the creditors ofthe Insolvency-Symptomatic Company to commence jointsupervision by creditor institutions, claims of the creditors may befrozen for a maximum period of four months.

If creditors with voting rights corresponding to at leastthree-quarters of the total voting rights in the council consentto the proposed workout plan, then all members of the council(including dissenters) will be bound by the resolutions and theclaims of such creditors may be repaid only in accordance withthe terms of the workout agreement to be adopted by thecreditors. If a creditor financial institution dissented to theresolution to commence joint management or the workoutplan, and does not wish to be bound by the CRPA, it isentitled to demand that other members buy out its claimsagainst the debtor. The remaining consenting creditors usuallybuy out, or cause the debtor to buy out, the claims held by thedissenting creditor at a price equal to the liquidation value ofthe claims. If the creditors of the Insolvency-SymptomaticCompany believe that rehabilitation through one of thesupervision procedures set forth above is not feasible, theymay apply to the court for commencement of the rehabilitationproceedings under the DRBA.



The CRPA was initially enacted to be effective from September2001 until the end of 2005, but was subsequently reintroduced in2007 (expiring on 2010) and again in 2011. The CRPA iscurrently scheduled to expire on 31 December 2013 and itremains to be seen whether the Korean government will extendthe operation of the Act.

Director liabilityKorean law does not impose additional liability on directors orother officers of a debtor company during insolvency. Accordingto the Korean Commercial Code, directors are generally heldliable to the company for any action or inaction taken by willfulmisconduct or gross negligence in contravention of Korean lawor the company’s articles of incorporation. The only distinction forinsolvent companies is that, under the DRBA, the procedure foran insolvent company to claim compensation against thedirectors is simpler than under general Korean civil proceedings.

GuaranteesExcept where specifically prohibited under the anti-trust or anyother mandatory laws and regulations, a guarantee issued by aKorean company is generally recognised as a legal and validobligation of the guarantor. In rehabilitation or bankruptcy, aguarantee issued by the debtor company may be recognised asa rehabilitation claim or a bankruptcy claim. Any guarantee,however, issued within six months from the filing of a petition forrehabilitation by the debtor or the bank’s suspension of paymentobligation by the debtor is regarded as a “gratuitous act” that canbe voided by the receiver on the grounds of preference. TheKorean Supreme Court does not view any renewal of an existingguarantee within the six-month period as a voidable preference.

New money lending Once a stay order has been issued, the debtor company mayraise additional financing only with the approval of the court. Anyfinancing raised by the debtor company after the issuance of astay order, or any money borrowed by the receiver after theinitiation of rehabilitation proceedings with the approval of thecourt is characterised as a common benefit claim. Commonbenefit claims rank senior to both unsecured rehabilitation claimsand secured rehabilitation claims (but do not rank senior to thesecurity created over any specific asset of the debtor company),and may be repaid when due with available cash. In the casethat the debtor company’s assets are insufficient to repay theentire common benefit claim, any new debt is given a super-priority ranking over other common benefit claims, and thecommon benefit claims are repaid pro rata after the new debthas been paid in full. It is questionable, however, whether suchsuper-priority ranking may be given to new debt in the case ofbankruptcy proceedings that follow rehabilitation proceedings.

Cross border recognitionThe DRBA provides a system for the recognition of foreigninsolvency proceedings in Korea. In order for foreign insolvencyproceedings to be effective, court approval must be obtained.First, an application for a support order must be filed with theKorean court and the following elements must then be satisfied:

(a) an application in the form prescribed by the court must besubmitted, along with the relevant evidentiary documents;

(b) a court-prescribed fee must be paid to the court; and



(c) recognition of the foreign insolvency proceedings in questionmust not be contrary to the general principle of good moralsand social order of Korea.

Item (c) above is the key element that needs to be satisfied inorder to be recognized by the Korean court. The Korean courtgenerally accepts an application for recognition of foreigninsolvency proceedings unless, for instance, the priority of claimssignificantly differs from Korean law or where the creditors aredeprived of procedural rights under the relevant foreigninsolvency proceedings.

Once the foregoing elements are satisfied and the Korean courtapproves the foreign insolvency proceedings, the applicant mayfurther apply to the court for one or more of the following measures:

(a) suspension of lawsuits or administrative procedures in respectof the insolvent company’s business or assets in Korea;

(b) prohibition or suspension of any enforcement proceedings,such as compulsory enforcement, enforcement of security, ora preliminary attachment or preliminary injunction in respect ofthe insolvent company’s business or assets in Korea;

(c) order for the prohibition of repayment by the insolventcompany, or an order for the prohibition of disposal of theinsolvent company’s assets in Korea;

(d) appointment of an international insolvencyreceiver/administrator; or

(e) any other measure necessary for the protection of theinsolvent company’s business or assets or the interest ofcreditors in Korea.

In addition to the insolvent company’s assets in foreignjurisdictions, the assets of the insolvent company located inKorea may become part of the bankrupt estate for the benefit ofall creditors.

The DRBA does not limit the applicability or effectiveness ofKorean insolvency proceedings in foreign jurisdictions.






Malaysia


MalaysiaContributed by Chooi & Company

IntroductionThis section provides a general outline of the main corporateinsolvency procedures in Malaysia. The primary legislationgoverning corporate insolvency in Malaysia is the Companies Act1965, the Bankruptcy Act 1967 and the Companies (Winding-Up)Rules 1972. The legislative framework provides for:

(1) the rehabilitation of companies;

(2) the rights of secured creditors, equity holders and othercreditors where rehabilitation is not possible; and

(3) sanctions for officers who are guilty of intentionallycontributing to the insolvency of a company.

Insolvency law falls under the civil jurisdiction of the High Court.In states and territories where the High Court is divided intovarious divisions, insolvency matters are dealt with bycommercial division judges.

The following insolvency procedures are available under theMalaysian legal system:

(1) liquidation of corporate entities;

(2) private and court-appointed receivers (and managers); and

(3) court approved schemes of arrangement.

Liquidation Under the Companies Act 1965, there are two types ofliquidation – voluntary and compulsory.

Voluntary liquidation Voluntary Liquidation is divided into two types:

(1) members’ voluntary winding-up; and

(2) creditors’ voluntary winding-up.

A members’ voluntary winding-up requires a declaration ofsolvency by the directors stating that the company is able to payits debts in full within a period not exceeding 12 months aftercommencement of the winding-up. Where this is not possible,voluntary liquidation may only proceed by way of the creditors’voluntary winding-up process.

Members’ voluntary winding-up A solvent liquidation requires a declaration of solvency by thedirectors, followed by the passing of a special resolution towind-up the company and to appoint a liquidator. Upon theliquidator’s appointment, the transfer of shares or alteration inthe status of members is void, the directors’ powers ofmanagement cease, and business is discontinued unless theliquidator is of the view that continuing the business would bebeneficial. This option is only available if the company is stillsolvent and proceeds from the winding-up can satisfy alloutstanding debts. If the company is found to be insolvent, the


Key Elements:n Scheme of arrangements focus on company rescue

n Receivership available for secured creditors

n Moratorium available at the discretion of the court

n Powers of management can be displaced by a provisionalliquidator or receiver

Ms Shamala Balasundaram, PartnerLevel 5 Menara BRDB285 Jalan MaarofBukit Bandaraya59000 Kuala LumpurT: +603 2055 3888F: +603 2055 3880www.chooi.com.my



liquidator must take steps to change the mode of winding-up toa creditors’ voluntary winding-up.

Creditors’ voluntary winding-up Where a company is insolvent and a declaration of solvency isnot possible, the directors of a company may choose to initiatethe creditors’ voluntary winding-up process to liquidate thecompany. This requires the passing of a special resolution by thecompany’s members to wind-up the company, followed by aspecial creditors’ meeting to formally appoint the liquidator. As inthe case of a members’ voluntary winding-up, upon theliquidator’s appointment, the transfer of shares or alteration in thestatus of members is void, the powers of management ceaseand the business is discontinued.

Compulsory liquidationA court may order the winding-up of a company in a number ofcircumstances, although the most common ground is where thecompany is unable to pay its debts. The company is presumedinsolvent when it fails to pay a creditor after the service of astatutory demand.

The aim of this process is to liquidate the business in an orderlymanner, and to distribute the proceeds to the creditors (and inthe event of a surplus, to the members). Once a winding-uporder has been granted, the Court appoints a liquidator and thedirectors’ powers of management cease. Any disposition ofproperty, transfer of shares or alteration in the status of membersmade after commencement of the winding-up is void unless thecourt orders otherwise.

Winding-up proceedings are commenced by the presentation ofa winding-up petition to the court, which is then served on the

company. The compulsory winding-up process may be initiatedby a creditor, the company, contributory member or otherspecified persons.The winding-up petition and the date for thehearing must be advertised in at least two national newspapers.All creditors may appear at the hearing to support or oppose thepetition provided a “Notice of Intention to Appear” has been filed.Once the winding-up order has been obtained, a liquidator will beappointed to oversee the liquidation process to ensure theorderly realisation of assets and distribution of proceeds tocreditors and, where there is a surplus, members.

Inability of a company to pay its debtsA company is deemed unable to pay its debts if:

(a) a creditor, to whom the company is indebted in a sumexceeding MYR500 then due, has served on the company awritten demand (known as a statutory demand) requiring thecompany to pay the sum due, and the company has for threeweeks neglected to pay the sum or to secure or compound forit to the reasonable satisfaction of the creditor; or

(b) a judgment against the company is unsatisfied; or

(c) it is proved to the satisfaction of the court that the companyis unable to pay its debts as they fall due.

In order to obtain a winding-up order it may not be necessary fora creditor to have served a statutory demand on the company orto have an unsatisfied judgment debt, if it has other evidence todemonstrate that the company is insolvent.

Provisional liquidationAt any time after a winding-up petition has been presented tocourt and before a winding-up order has been made, anapplication may be made by any creditor, contributory (member)



or by the company itself for the appointment of a provisionalliquidator where the company’s property is in danger or where itis alleged the company’s management is misappropriating orwasting the company’s assets.

Duties and powers of the liquidatorThe liquidator in a compulsory liquidation is subject to thesupervision of the Official Receiver, or where the Official Receiveris the liquidator, the relevant minister. He or she is accountable tothe creditors for the conduct of the liquidation and remains soaccountable until his or her release as liquidator. The functions ofa liquidator in a compulsory liquidation are to ensure that thecompany’s assets are realised and the proceeds distributed tothe company’s creditors and, where there is a surplus, members.The liquidator or the provisional liquidator (as the case may be)takes into his or her custody, or into his or her control, all theproperty to which the company is or appears to be entitled. Theliquidator has very broad powers, some of which may only beexercised with the sanction either of the court or of thecommittee of inspection. However, the liquidator only has limitedpower to carry on the business (to the extent necessary tocollect and realise the assets) and in practice it is relativelyunusual for a liquidator to achieve a sale of the business as agoing concern.

Powers of the company’s managementThe powers of a company’s management are displaced upon theappointment of a provisional liquidator or a liquidator appointedby the court in winding-up proceedings.

Interests of membersInterests of members are generally unaffected by the insolvencyprocedures, although in such circumstances there is likely to be

little value in their shareholdings. The legislative framework,however, restricts members’ rights to dispose of the company’sproperty, transfer shares or to prefer the payment of one creditorover another once a winding-up has commenced.

Contracts to which the company is a partyContracts do not automatically terminate when a winding-uporder is made. The liquidator can, however, disclaim unprofitablecontracts within 12 months after the commencement ofwinding-up or any such extended period allowed by the court.

The remedies of specific performance and damages for breach ofcontract remain available to a contracting party even after aliquidator has been appointed.

Legal proceedings to which the company is partyAt any time after a winding-up petition has been presented to thecourt and before a winding-up order has been made, thecompany or any creditor or contributory (member) may apply tothe court to stay or restrain pending legal proceedings againstthe company. Once a winding-up order has been made, or aprovisional liquidator has been appointed pending the winding-uporder, proceedings may not be commenced or continued againstthe company except with leave of the court. At this point,creditors will generally cease their court proceedings and file theirproofs of debt directly with the liquidator. However, a securedcreditor remains free to enforce its security during this period.

Creditors’ claimsThe following types of creditor claims are admissible underMalaysian law for payment during the course of liquidation:

n unliquidated damages for breach of contract and breachof trust;



n all debts and liabilities (other than unliquidated claims notmentioned above) whether present or future, certain orcontingent (and an estimated value shall be placed on alldebts that do not bear a certain value); and

n without derogating from the above, salary, wages, rent,interest and liquidated damages.

The creditor claims need to be substantiated by lodging a proofof debt with the liquidator for approval. In the event the liquidatorrejects the claims, the creditor may appeal to the High Courtagainst such rejection. In respect of secured creditors, a proof ofdebt may be lodged with the liquidator for the unsecured balanceof their claims.

Any claims disputed by the liquidator may be adjudicated by theHigh Court.

ReceivershipPrivate receiver Under the terms of a debenture, a secured creditor is generallyentitled to appoint a receiver in the event of a default by theborrowing company. The receiver is empowered to takepossession of the assets subject to the charge in the debentureinstrument, and he or she may opt to dispose of those assets byprivate sale or seek expressions of interest by way ofadvertisements in the major newspapers.

Special considerations arise in relation to land. If there is astatutory charge on the land, the chargee may instituteforeclosure proceedings in the High Court pursuant to theNational Land Code 1965 to obtain an order for sale.

Alternatively, the lender may appoint a receiver and manager(where provision has been made for his or her appointment in thesecurity agreement) who may then either sell the land by privatetreaty or commence foreclosure proceedings. The option to sellby private treaty is not available once an order for sale isobtained in foreclosure proceedings. Once an order for sale hasbeen obtained, the charged land must be sold by public auction.

Most debentures also provide for the receiver to be appointed asboth the receiver and manager of the company, in which casethe directors’ powers to manage the company are suspendedupon appointment. When a company in receivership is placedinto liquidation, the receiver and manager will lose his or herpower as manager/agent of the company to the liquidator, butwill retain possessory rights over any charged assets during theperiod of liquidation.

Court-appointed receiverWhere there is no express contractual power to appoint a receiver,a court-appointed receiver may be sought to preserve assetsthought to be in jeopardy. The powers of a court-appointedreceiver are set out in his or her appointment order. A courtappointed receiver must be independent, and has an obligation tobalance the interests of all parties concerned, including those ofthe company and the company’s creditors. A receiver appointedby a debenture holder owes his or her primary duty to theirappointer and must ensure that the interests and returns of thedebenture holder are protected.

The process of appointing a court-appointed receiver is initiatedby an application by a member or creditor of the company bysummons to the court.



Contracts to which the company is a partyA privately appointed receiver may choose to adopt contracts towhich the company is a party.

Even after a receiver is appointed, the remedies of specificperformance and damages for breach of contract remainavailable to a contracting party. It should be noted, however, thatin a receivership, specific performance requiring payment offunds by the receiver is not permitted.

Legal proceedings to which the company is a partyThe continuation or commencement of legal proceedings againstthe company is not affected by the appointment of a private orcourt-appointed receiver.

Court approved schemes of arrangement Schemes of arrangement are used as a method of formalcorporate rescue. Schemes require approval by 75% in value anda simple majority in number of each class of creditors ormembers present and voting, as well as the subsequent sanctionof the High Court. Secured creditors are generally categorisedinto their own class or classes. A scheme of arrangement isinitiated by filing an originating summons seeking the court’sleave to call and convene meetings of classes of creditors andmembers of the company to consider and vote on a scheme ofcompromise and arrangement. Thereafter, notices of classmeetings are to be sent to the company’s creditors andmembers. The company’s incumbent management retains itspowers for the duration of the scheme proceedings.

Once the originating summons seeking leave has been filed, thecompany or any member or creditor can apply to the High Courtseeking a stay order to restrain any further proceedings against

the company until the court makes a determination on thescheme. A stay order will typically preclude the appointment of areceiver and manager under a debenture as well as theenforcement of security. If the scheme is approved, all creditorssubject to the scheme are bound and must comply with its terms.

Challenges to antecedent transactionsIn some circumstances, the transfer, mortgage, delivery ofgoods, payment, execution or other act relating to company’sproperty may, if made within the six months prior to thepresentation of a winding-up petition or the passing of aresolution to voluntarily wind-up the company, constitute afraudulent preference and be clawed back by a liquidator.Similarly, where any property, business or undertaking has beenacquired at an overvalue or sold at an undervalue to a relatedparty of the company, within a period of two years before thecommencement of the winding-up of the company, the liquidatormay recover the difference between the consideration paid andthe value of the property, business or undertaking.

In addition, disposals of the company’s assets subsequent to thepresentation of a winding-up petition are void without thesanction of the court.

Personal liability for directorsDirectors are generally not held personally liable for the debts ofthe company. If during the course of liquidation, however, itappears the business of the company has been carried out withintent to defraud creditors or for a fraudulent purpose, a courtmay hold any person knowingly a party to such conductpersonally liable without any limitation of liability for all or any ofthe debts or other liabilities of the company. An application may



be made by a liquidator, creditor or contributory (member) to thecourt seeking an order that the offending person be heldpersonally liable for such debts. In addition to personal liability,criminal sanctions against such conduct include a penalty ofthree years, imprisonment or MYR10,000.

An officer of the company who knowingly incurs a debt with noreasonable grounds of expecting that the company would beable to repay is criminally liable to imprisonment for one year orMYR5,000. The court may also inquire into the conduct of thecompany’s officers and order the officers to make restitution orpay damages where they misapply or wrongfully retain thecompany’s property, or are otherwise guilty of any misfeasance orbreach of duty.

Lender liability In general, the risk of a lender being held liable to pay itscustomer’s debts is small.

Guarantees A guarantee is a secondary obligation by a third party relating toa primary obligation by a contracting party (i.e. a borrower undera loan agreement). If the primary obligation is altered, dischargedor fails, the guarantee may not be enforceable.

Guarantees are available in most circumstances, for exampledownstream, upstream or cross-stream guarantees. Corporatebenefit issues need to be addressed especially in the context ofupstream and cross-stream guarantees.

Guarantees may be challenged and set aside if they amount toan unfair preference transaction.

Guarantees given by a company which subsequently goes intoliquidation, whether granted in favour of its parent, a subsidiary orsibling company, will generally remain valid.

PriorityIn Malaysia, the order of priority for the distribution of proceeds tocreditors is prescribed by the Companies Act 1965.

Secured creditors are paid out of the proceeds from therealisation of secured assets. If the proceeds are insufficient todischarge the secured obligations in full, the portion remainingoutstanding ranks as an unsecured debt. In the context ofreceivership, proceeds from the realisation of charged assets aredistributed in the following order of priority.

n the costs and expenses of realising the property;

n the costs and expenses of the receivership, including theremuneration of the receiver, and the costs and remunerationof the trustee for the debenture holders (if any);

n the costs of the plaintiff in a debenture holder’s action;

n the claims of section 191 preferential creditors (whichcomprise wages, accrued leave, superannuation entitlements,Employees Provident Fund (‘EPF’) and any loans that directlyrelate to the payment of these claims) if the debentures aresecured by a floating charge;

n any sums due to the debenture holders in respect of principaland interest; then

n federal taxes.



Claims in liquidation (without deferment of a floating charge) rankas follows:

n cost and expenses of winding-up, including costs of thepetitioner and remuneration of the liquidator;

n wages and salaries not exceeding MYR1,500 for servicesrendered within the four months prior to the commencementof winding-up;

n worker’s compensation which accrued prior to thecommencement of winding-up;

n remuneration payable for vacation leave which accrued priorto the commencement of winding-up;

n EPF contributions for the 12 months prior to thecommencement of winding-up;

n federal taxes; then

n unsecured creditors.

Claims in liquidation (involving a deferment of a floating charge)rank as follows:

n cost and expenses of winding-up;

n wages and salaries not exceeding MYR1,500 for servicesrendered within four months prior to the commencement ofwinding-up;

n remuneration payable for leave which accrued prior to thecommencement of winding-up;

n EPF contributions for the 12 months prior to thecommencement of winding-up;

n any floating charges;

n worker’s compensation which accrued prior to thecommencement of winding-up;

n federal taxes; then

n unsecured creditors.

New money lendingNew monies provided by lenders during the rehabilitationprocedure do not give rise to any priority in terms of repaymentunless such priority forms part of the scheme of arrangementduly sanctioned by the court.

Recognition of foreign insolvencyproceedingsThe courts of Malaysia generally recognise foreign insolvencyproceedings commenced in foreign jurisdictions in accordancewith the rules of private international law as they apply inMalaysia. A foreign liquidator of a foreign company placed intoliquidation in its place of incorporation is recognised as havingthe powers and functions of a local liquidator. The High Courtmay, however, appoint a local liquidator to realise or dispose ofthe assets of a foreign company located in Malaysia. In bothcircumstances, any proceeds arising from the sale of the assetslocated in Malaysia will be distributed to the foreign liquidatoronly after discharging the foreign company’s outstanding debtsand liabilities incurred in Malaysia.



Claims by foreign creditors are not subject to any special oradditional requirements to be proved in insolvency. However,under the Exchange Control Act 1953, the approval of theController of Exchange Control (i.e. Bank Negara Malaysia) isrequired to repatriate any amounts recovered. In practice, theBank Negara Malaysia will usually grant such approval.

Foreign insolvency administrators are entitled to claim, takecontrol of, and realise or deal with the property of a foreigncompany situated within Malaysia if the exercise of such powersis authorised by the law of the country where the foreigncompany is incorporated.





The Philippines


The PhilippinesContributed by Belo Gozon Elma Parel Asuncion Lucila

IntroductionThis section is designed to provide a general outline of the maincorporate insolvency procedures available in the Philippines. Theinsolvency regime in the Philippines was recently revised, withthe Financial Rehabilitation and Insolvency Act of 2010 (“FRIA”)taking effect from September 2010. It replaces the InsolvencyLaw of 1907. The aim of the FRIA is to ensure the effective andefficient rehabilitation or liquidation of companies in a mannerthat guarantees certainty and predictability in commercial affairs,preserves the value of the assets of companies and recognisescreditor rights and claims.

There are also bespoke insolvency regimes for certain other typesof companies/entities, such as banks, insurance companies, aswell as national and local government agencies and units(although government financial institutions including governmentowned and controlled corporations are subject to the FRIA).These are expressly excluded from the operation of the FRIA, andare beyond the scope of this note.

There are two principal insolvency procedures in thePhilippines, namely:

(1) rehabilitation; and

(2) liquidation.

Under the regime’s transitional arrangements, the FRIA will applyto all proceedings commenced after September 2010 in relationto any pending rehabilitation or liquidation procedures whichwere initiated under the previous regime. The previous regime willcontinue to apply however where, in the opinion of the court, theapplication of the FRIA would not be feasible or would give riseto an injustice.

Rehabilitation Rehabilitation is principally a procedure intended to rescuecompanies which are or may become insolvent. The procedure isonly available where it is shown that creditors will recover more ifthe company continues as a going concern than if it wereimmediately liquidated.

Three rehabilitation processes exist under the FRIA, namely:

(1) court-supervised rehabilitation;

(2) pre-negotiated rehabilitation; and

(3) an out-of-court informal restructuring agreement orrehabilitation plan.

Court-supervised rehabilitationThere are two types of court-supervised rehabilitation procedures,namely voluntary rehabilitation and involuntary rehabilitation.

In a voluntary rehabilitation, the company files a petition forrehabilitation with the court. The process is initiated by amajority vote of the board of directors or trustees and issubsequently authorised by a vote of the stockholdersrepresenting at least two-thirds of the outstanding capital stock


Key Elements:n Rehabilitation focuses on company rescue.

n Moratorium available has ability to restrict secured creditors.

Mr Roberto Rafael V. Lucila, Senior Partner15th and 16th Floor, Sagittarius CondominiumH. V. Dela Costa Street, Salcedo VillageMakati City1227 PhilippinesT: +632 816 3716F: +632 817 0696, +632 812 0008www.bgepal.com



or, in the case of a non-stock corporation, by a vote of at leasttwo-thirds of the members.

In an involuntary rehabilitation, the creditors of the companyinitiate the proceedings by filing a petition with the court. This isonly available, however, to creditors with an aggregate claim ofthe higher of PHP1,000,000 or at least 25% of the subscribedcapital stock. In addition:

(a) there must be no genuine issue in fact or law in respect ofthe claim, and the claim must be due and/or demandableand no payments must have been received for at least60 days;

(b) the company must have failed generally to meet its liabilitiesas they fall due; or

(c) a creditor, other than the petitioner, must have initiatedforeclosure proceedings against the company that will preventthe company from paying its debts as they fall due.

Effect of court-supervised rehabilitationWhere the court is satisfied of the viability of the company’srehabilitation, it will issue a Commencement Order that appointsa rehabilitation receiver. A copy of the Commencement Ordermust be published in a newspaper of general circulation and fora voluntary rehabilitation, requires a copy of the petition bedelivered to the company’s creditors.

The Commencement Order prohibits the company’s suppliersfrom withholding the goods or services where the companymakes payment for goods and services after the date of theorder, creates a moratorium during which no insolvencyproceedings or other legal proceedings, including enforcementof security, can be taken without the permission of the court

(although pending proceedings may be continued), andrenders void the exercise of set-off rights by any of thecompany’s creditors.

The Commencement Order also prohibits the use of self-helpremedies in relation to the seizure or sale of the company’sproperty, prohibits the company from selling, encumbering,transferring or disposing in any manner any of its property exceptin the ordinary course of business, and prohibits the companyfrom making any payment of its liabilities outstanding as of thecommencement date.

Management of the company remains with the existing directors.However all powers in relation to payments or the sale, disposal,assignment, transfer or encumbrance of property requireapproval of the rehabilitation receiver and/or court.

All contracts of the company with creditors and other third-partiescontinue provided the company confirms the contracts within90 days following the commencement of proceedings. Contractualobligations arising or performed during this election period or afterthe contracts have been confirmed are not subject to themoratorium and are to be paid when they fall due. Contracts notconfirmed within the required deadline are terminated and anyresulting claims become subject to the moratorium.

Powers of the rehabilitation receiverThe primary duties of the rehabilitation receiver are to preserveand maximize the value of the company’s assets, determine theviability of the rehabilitation process, prepare and submit arehabilitation plan to the court and implement the rehabilitationplan once approved.



The rehabilitation receiver has power to take custody or control ofthe company’s property to preserve its value, recover all amountsowing to the company, recover any fraudulent payments made bythe company or payments which constitute undue preferences ofits creditors, and to monitor the operations and business of thecompany. Importantly, the rehabilitation receiver has no power toassume control of the company or to sell the property of thecompany unless the court orders otherwise.

The rehabilitation receiver may apply to the court for authorisationto sell the company’s unencumbered property outside its ordinarycourse of business where it can show that the property isperishable, costly to maintain, susceptible to devaluation orotherwise in jeopardy.

Similarly, the rehabilitation receiver may apply to the court forauthorisation to dispose of the company’s encumbered propertyor property of others held by the company where:

(a) the rehabilitation receiver obtains the consent of the securedcreditor or property owners;

(b) the court determines the disposal is necessary for thecontinued operation of the company’s business; and

(c) the company provides a substitute lien or ownership right thatprovides an equal level of security for the counterparty’s claimor right.

Where the company’s property is in danger or where it is allegedthat those in control of the company are misappropriating orwasting the company’s assets, an application may be made byany interested party to the court for a rehabilitation receiver ormanagement committee to assume control of the company.

Initial hearingWithin 40 days of the initial hearing, the rehabilitation receivermust submit a report to the court including his or her preliminaryfindings and recommendations. If the court finds that thecompany is insolvent and there is a substantial likelihood of thecompany being successfully rehabilitated, it will make an orderupholding the rehabilitation petition and direct the rehabilitationreceiver to consult with the company and its creditors and reviseor recommend action on the Rehabilitation Plan.

If the court finds that the company is insolvent but rehabilitation isunlikely, it will place the company into liquidation. Finally, thecourt may dismiss the petition where it finds that:

(a) the company is not insolvent;

(b) the petition is a sham intended only to delay the enforcementof the rights of the creditors;

(c) the petition contains materially false or misleadingstatements; or

(d) the company has defrauded its creditors.

If the petition is dismissed, the court may, in its discretion, orderthe petitioner to pay damages to any creditor or to the companyinjured as a result of the filing of the petition.

Rehabilitation planOnce the rehabilitation receiver finalises the Rehabilitation Plan,he or she will put it to the company’s creditors for approval. Therehabilitation plan is only approved where it is passed by allclasses of creditors (secured or unsecured) whose rights areadversely modified or affected by the plan. This requires creditorsholding more than 50% of the total claims in each class to vote in



favour of the plan. Once approved, the court is then required toconfirm the plan, at which point the plan becomes binding on thecompany and all classes of creditors. Rehabilitation plans mayonly be confirmed by the court if it meets certain statutoryrequirements. Importantly, rehabilitation plans must maintain thesecurity interest of the secured creditors and preserve theliquidation value of their security. The moratorium continuesexcept in relation to claims arising after approval of the plan.

The court may confirm a rehabilitation plan in the absence ofcreditor approval where it is of the opinion that the company’screditors would receive greater compensation than if thecompany were placed into liquidation.

Terminating the rehabilitation planAny stakeholder or the rehabilitation receiver may apply to thecourt seeking termination of the rehabilitation proceedings. If thecourt finds the implementation of the Rehabilitation Plan hasbeen successful, it will terminate the proceedings lifting anymoratorium or other court orders. If, however, the court finds theimplementation of the Rehabilitation Plan has failed, it will placethe company into liquidation.

Secured creditorsSecured creditors are also subject to the moratorium, howevermay apply to the court for orders to preserve their security if theycan show they do not have adequate protection over theproperty securing their claim (for example, where insurancelapses) or to enforce their security where the property is notrequired for the rehabilitation of the company. The rehabilitationprocedure is not intended to diminish the value of security or

rights of a secured creditor, except insofar as it suspends theright to enforce during the moratorium period.

Rehabilitation plans may only be confirmed by the court if theymaintain the security interest of the secured creditors andpreserve the liquidation value of their security.

Pre-negotiated rehabilitation This proceeding is initiated either by the company or the companyjointly with any of its creditors. A petition for a rehabilitation planmay be filed for approval by creditors holding at least two-thirds ofthe total liabilities of the company. This must include creditorsholding at least 50% of the total secured claims, and creditorsholding at least 50% of the unsecured claims. If the petition issatisfactory in form and substance, the court must grant an orderrequiring a copy of the order be distributed to the company’screditors and published in a newspaper of general circulation,appoint a rehabilitation receiver (if provided for in the plan) andprovide for a moratorium on enforcement.

The court must approve the pre-negotiated plan unless a creditoror other interested party submits an objection. If the courtdetermines that either the company or the creditors who supportthe Rehabilitation Plan acted in bad faith, or that the objection isnon-curable, the court may place the company into liquidation. Afinding by the court that the objection has no substantial merit orthat the objection has been cured will be deemed to be anapproval of the Rehabilitation Plan. Similarly, the court has a period of 120 days from the date of filing the petition to approvethe Rehabilitation Plan, after which time the Rehabilitation Plan isautomatically approved.



Out-of-Court Informal Restructuring Agreements orRehabilitation PlansThe FRIA recognises out-of-court restructuring agreements andRehabilitation Plans which have the same legal effect as a plansanctioned by the court, provided:

n it is agreed to by the company; and

n approved by the creditors holding at least 85% of the totalliabilities of the company, which must include the creditorsrepresenting at least 67% of the secured obligations, andthose representing at least 75% of the unsecured obligationsof the company.

Such plans require publication for at least three consecutiveweeks in a newspaper of general circulation in the Philippines.The Rehabilitation Plan or restructuring agreement takes effectafter 15 days have elapsed from the date of the last publicationof the notice.

LiquidationThe liquidation of an insolvent company is intended to provide forthe winding up of the company and the equitable distribution ofthe company’s assets.

There are two forms of liquidation, namely:

(1) involuntary liquidation (sometimes called compulsory windingup); and

(2) voluntary liquidation.

At any time during the course of the court-supervised orpre-negotiated rehabilitation proceedings, the company or itscreditors may apply to the court to place the company intoliquidation. Similarly, the court of its own volition may place the

company into liquidation during the course of court-supervised orpre-negotiated rehabilitation proceedings, or following arecommendation by the rehabilitation receiver who has formedthe view that rehabilitation of the company is not feasible.

Voluntary liquidation is initiated by the company and requires apetition establishing its insolvency.

Involuntary liquidation is initiated by at least three creditors withan aggregate claim that is equal to or exceeds PHP1,000,000 or25% of the subscribed capital stock of the company. In addition,the qualified creditors must show:

(a) there is no genuine issue in fact or law in relation to theclaims of the petitioners;

(b) the claim is due and/or demandable and no payments havebeen received for at least 180 days, or that the company hasfailed generally to meet its liabilities as they fall due; and

(c) there is no substantial likelihood that the company maybe rehabilitated.

Effect of a liquidation orderIn both a voluntary and involuntary liquidation, the court mustissue a liquidation order if the petition is satisfactory in form andsubstance. The liquidation order will deem the companydissolved and its corporate existence terminated. Legal title andcontrol of all the company’s assets, except those exempt fromexecution, will vest in the liquidator or, pending his or her electionor appointment, with the court. The liquidation order will alsodirect all payments and any claims or conveyance of propertydue to the company be made to the liquidator, prohibit paymentsor the transfer of any property by the company, authorise thepayment of administrative expenses as they fall due, and directall creditors to file their claims with the liquidator.



All contractual obligations of the company will be terminatedand/or breached unless the liquidator declares otherwise and thecontracting party agrees within 90 days from the date of his orher assumption of office.

The order provides for a moratorium such that no separateactions for the collection of an unsecured claim will be allowed,and those already pending will be transferred to the liquidator tosettle or contest.

Secured creditors may enforce rightsAlthough liquidation has the effect of suspending legalproceedings against the company, liquidation does not overridethe rights of secured creditors who remain free to enforce theirsecurity and to retain the proceeds of enforcement in priority tothe claims of unsecured creditors. However, no foreclosureproceedings are permitted for a period of 180 days from the dateof the liquidation order.

General unsecured claims are settled in the following order:claims constituting legal liens under Article 2241 or 2242 of theCivil Code, followed by preferential creditors (such as employeesand labourers of the company as defined by Article 2244 of theCivil Code) and, finally, unsecured creditors.

Powers of the liquidatorThe liquidator is an officer of the court and subject at all times tothe control of the court. He is responsible to the creditors for theconduct of the liquidation and remains so responsible until hisrelease as liquidator. The functions of a liquidator in a compulsoryliquidation are to ensure that the company’s assets are collectedin (including recovery of any property fraudulently conveyed bythe company), realised and distributed to the company’s

creditors, and to pay any surplus to the persons entitled to it.The liquidator takes into his custody all the property to which thecompany is or appears to be entitled. The powers of thedirectors cease. The liquidator has very broad powers, some ofwhich may only be exercised with the sanction either of the courtor of the liquidation committee of creditors.

Within 3 months from the liquidator’s assumption of office, theliquidator is required to submit a Liquidation Plan to the courtwhich must include a list of the company’s assets and schedulefor the liquidation of those assets and payment of claims. Onceapproved by the court, the liquidator is empowered to sell thecompany’s assets and settle creditor claims.

The liquidator will generally sell the unencumbered assets of theinsolvent debtor at a public auction. However, a private sale maybe allowed with the approval of the court if;

(a) the goods to be sold are of a perishable nature, are likely toquickly deteriorate in value or are disproportionatelyexpensive to keep or maintain; or

(b) the private sale is in the best interests of the company andits creditors.

With the approval of the court, the company’s unencumberedproperty may also be conveyed to a creditor in satisfaction ofits claim.

Challenges to antecedent transactionsAny transaction occurring prior to the issuance of a LiquidationOrder or a petition for rehabilitation proceedings (theCommencement Date), may be rescinded or declared null andvoid where it was executed with intent to defraud the creditors or



where it constitutes an undue preference of creditors. Theseinclude transactions which:

(a) within 90 day period prior to the Commencement Date,provide unreasonably inadequate consideration to thecompany, involve the accelerated payment of a claim to acreditor or provide security or additional security;

(b) involve creditors, where a creditor obtained, or received thebenefit of, more than its pro rata share in the assets of thecompany, executed at a time when the company wasinsolvent; or

(c) are intended to defeat, delay or hinder the ability of thecreditors to collect claims where the effect of the transactionis to put assets of the company beyond the reach of creditorsor to otherwise prejudice the interests of creditors.

The rehabilitation receiver or any creditor with the rehabilitationreceiver’s consent may initiate an action to rescind or declare atransaction void.

Guarantees In the Philippines, the concepts of “guarantee” and “suretyship”are distinguished under the Civil Code. Pursuant to the Civil Code,the essential characteristic of a suretyship is that primary liabilityfalls on the surety. That liability is wholly independent of any liabilitywhich may arise between the debtor and the creditor. In contrast,under a guarantee, the guarantor is under a secondary obligationwhich is dependent on the default of the debtor.

Guarantees are available in most circumstances and may be givenas credit support for future debts, the amount of which may beunknown at the time of granting the guarantee. As a general

principle, the guarantor cannot be compelled to pay the creditorunless the creditor has first exhausted all recourse against thedebtor. However, the parties may contract out of this generalprinciple or it may be disapplied as a result of other exceptionscontained in the Civil Code. In addition, the enforceability of aguarantee can also be prejudiced as a result of certain actionstaken by the creditor, including, for example, the granting of anextension to the debtor without the consent of the guarantor or, inthe context of a contract involving co-guarantors, the release ofone guarantor without the consent of the other guarantors.

New money lendingNormally lenders will insist on additional security or priority (aheadof debts incurred prior to the proceedings) before any newmonies are advanced to companies after the opening of anyinsolvency proceedings. The company, with the approval of thecourt, may enter into new finance arrangements and encumberits property to aid in its rehabilitation. Payment obligations arisingout of any new finance arrangements are not subject to themoratorium and are to be paid when they fall due.

Personal liability of directorsDirectors and officers who willfully:

(a) dispose or cause to be disposed any property of thecompany other than in its ordinary course of business;

(b) authorise any transaction in fraud of creditors or in a mannergrossly disadvantageous to the company or its creditors; or

(c) embezzle or misappropriate any property of the company,

are be liable to double the value of the transaction involved orproperty disposed of or embezzled, whichever is higher.



Recognition of foreign insolvency proceedingsThe FRIA adopted the Model Law on Cross-Border Insolvency of theUnited Nations Commission on International Trade Law (UNCITRAL).

If there is a rehabilitation proceeding filed by a foreign entity inanother jurisdiction, a petition may be filed by the representativeof the foreign entity and the court may issue order:

(a) suspending any action to enforce claims against the entity, orotherwise seize or foreclose on property of the foreign entitylocated in the Philippines;

(b) requiring the surrender of property of the foreign entity to theforeign representative; or

(c) providing other necessary relief.

In determining whether to grant relief to a foreign entity, the courtmust consider;

(a) the protection of creditors in the Philippines, and theinconvenience in pursuing their claim in a foreign proceeding;

(b) the just treatment of all creditors through resort to unifiedinsolvency or rehabilitation proceedings;

(c) whether other jurisdictions have given recognition to theforeign proceeding;

(d) the extent to which the foreign proceeding recognises therights of creditors and other interested parties in a mannersubstantially in accordance with the FRIA; and

(e) the extent to which the foreign proceeding has recognisedand shown deference to proceedings under the FRIA andprevious legislation.





Singapore


IntroductionThis section provides a general outline of the main corporateinsolvency procedures in Singapore. Most of the relevantlegislation is contained in the Companies Act. The principallegislation in Singapore governing corporate insolvency is theCompanies Act (Chapter 50). It is supplemented by theCompanies (Winding-Up) Rules. Certain provisions of theBankruptcy Act (Chapter 20) also apply to corporate insolvencyin Singapore. The insolvency regime in Singapore is mainlycategorised into liquidation (Part X of the Companies Act) andrehabilitation (Part VII and Part VIIA of the Companies Act).


(1) receivership;

(2) judicial management/rehabilitation;

(3) liquidation.

We also consider very briefly schemes of arrangement, voidabletransactions, the personal liability of directors, lender liability,guarantees, priority of security and claims, new money lendingand the recognition of foreign insolvency proceedings.

Tests for insolvencyThere are two principal tests for insolvency: the cash flow testand the balance sheet tests. Under the cash flow test, acompany is insolvent if it is unable to pay its debts as they falldue. Under the balance sheet test, a company is insolvent if itsliabilities exceed its realisable assets.

In Singapore, an application may be presented to the court for anorder that a company is to be wound up compulsorily if it isunable to pay its debts. A company is deemed to be unable topay its debts where:

(a) a sum exceeding SGD10,000 has fallen due and followingthe service of a formal demand, it remains unpaid for threeweeks or more;

(b) the execution or other process issued in relation to ajudgment has been unsuccessful in whole or in part;

(c) the court is satisfied upon considering the contingent andprospective liabilities of the company that it is unable to payits debts.

ReceivershipReceivership is regulated by Part VIII of the Companies Act.

A receiver is a person who is appointed to collect, protect andreceive property and income from property. A receiver may beappointed in respect of a company encompassing its entirebusiness and undertaking, or in respect of a particular asset orassets of the company. He or she may be appointed by the courtor out of court by persons entitled to do so pursuant to

SingaporeContributed by Clifford Chance (Singapore office)

Key Elements:n Voluntary administration procedure focuses on company

rescue and provides for an automatic moratorium

n Receivership available as a self help remedy forsecured creditors

n Challenges to antecedent transactions



contractual arrangements (e.g. debenture holders - receivershipis the typical method of enforcing a debenture in the event ofdefault). The court may appoint a receiver in respect of acompany where, for example:

(a) the company is incapable of managing its own affairs;

(b) its assets are in jeopardy and creditors need protection;

(c) shareholders are in dispute and it is necessary to appoint animpartial receiver to preserve the status quo; and

(d) a receiver is necessary in aid of execution of a judgment.

A body corporate or an undischarged bankrupt cannot beappointed as a receiver. Although the court has power to appointa receiver, it will usually not exercise the power unless it issatisfied that there is a real concern that the company’s assetsmay be in jeopardy or dissipated.

The primary function of a receiver is to realise the company’sassets to discharge the debt owed to the debenture holder. Thisis subject to paying any preferential creditors’ claims from assetssecured by a floating charge. Secured creditors will rank inpriority to other creditors.

A receiver appointed by the court is not an agent of any personbut is an officer of the court. A receiver appointed out of courtmay be the agent of the person appointing him. Unless thedebenture provides otherwise, receivers appointed out of courtare not agents of the company. A receiver’s primary duty is not tothe company but to the debenture holders who appointed him orher. However, the acts of the receiver are deemed to be the acts

of the mortgagor, and will bind the mortgagor accordingly. Hemay, however, owe limited fiduciary duties to the company andmust exercise diligence and care when disposing of thecompany’s assets. A receiver is also required to ensure that allcorrespondence of the company states that a receiver has beenappointed and to lodge with the Registrar of Companiesdetailed accounts.

In certain circumstances, a receiver may be liable for any debtsincurred by him or her during the course of the receivership. If areceiver is not appointed under a debenture, an application canbe made to the court to appoint a receiver on behalf of thedebenture holders or other creditors of the company. After thedebenture holder has been paid off, the company may continueto trade. However, in most cases, the company will not be in aposition to continue and will be wound up.

The office of “receiver” per se does not confer any power to carryon the business of the company. If the company is to continue totrade at all, it is necessary to appoint a receiver and manager.

In the event of winding up, the receivership continues insofar as itis not inconsistent with the winding up.

Judicial ManagementJudicial management is intended to operate as a means torehabilitate and/or facilitate the restructuring of troubledcompanies. Under Part VIIIA of the Companies Act, thecompany, its directors, or a creditor may apply to the court toappoint a judicial manager if the court is satisfied that thecompany is unable to pay its debts and that the grant of a



judicial management order is likely to achieve one or more of thefollowing purposes:

(a) the survival of the company or its undertaking as agoing concern;

(b) the approval of a compromise or a scheme of arrangementwith the creditors; or

(c) a more advantageous realisation of the company’s assetsthan in a winding up.

The court may make a judicial management order if it considersthat the public interest so requires, even if the above purposesmay not be fulfilled. A judicial management order is unlikely to begranted if creditors are able to achieve the intended purposes ofthe judicial management order through some other way withoutany detriment to the company, or if the creditors would sufferirreparable loss as a result of the judicial management order.

If a judicial management order is granted, the court will appoint ajudicial manager who will manage the affairs, business andproperty of the company. A judicial management order, unlessotherwise discharged, is effective for a period of 180 days fromthe date of the granting of the order. Such period may beextended by an application of the judicial manager. Unless it is inthe public interest to do so, the court may not grant an orderunless it is satisfied that the holder of a debenture secured by afloating charge over the whole (or substantially the whole) of thecompany’s assets will not oppose the making of the order andhas not or will not exercise its right to appoint a receiver.

Upon the making of an application for the appointment of ajudicial manager, the court has the power to appoint an interimjudicial manager pending the making of a judicial managementorder. The applicant would have to provide good reasons whysuch an appointment should be made, such as where there is adanger that the assets of the company will be dissipated inthe interim.

Once a judicial management order (or an interim judicialmanagement order as the case may be) is made, there is astatutory moratorium preventing legal proceedings from beingcommenced or continued against the company subject to thejudicial manager’s consent or the leave of court. This includesrestricting a secured creditor from enforcing any of its securityover the company’s property.

A judicial manager acts as the agent of the company.Accordingly, the company will be bound by any contracts ortransactions the judicial manager enters, within his or herauthority, on the company’s behalf. The company has a duty toindemnify the judicial manager in respect of any debts or liabilitiesunder such contracts entered into by the judicial manager, inpriority to all other debts except those subject to certain securityinterests specified in the Companies Act.

Judicial management is deemed to have commenced at the timeof the making of the application for judicial management.

The judicial management order made by the Court is valid for180 days. However, it is open to the judicial manager to apply to



the Court for an extension of the judicial management order and it isa matter for the Court’s discretion whether to grant the extension.

Scheme of Arrangements andReconstructionSection 210 of the Companies Act provides that where acompromise or arrangement is proposed between the companyand its creditors, the court may order a meeting of creditors toconsider such compromise or arrangement.

The first formal step towards obtaining approval for a scheme ofarrangement is for the company proposing the scheme to applyto the Court for leave to convene a meeting of all or certain of itscreditors to consider and if thought fit to approve the scheme.One of the key tasks and responsibilities of the promoter of ascheme of arrangement is to consider whether the schemecreditors should be classified differently according to theirseparate interests and if so, to hold separate creditors’ meetings.After leave has been obtained, the prospective scheme creditorswill typically be requested to submit their proofs of debt alongwith any supporting documents to the chairperson of thecreditors’ meetings for his/her adjudication. The chairperson ofthe creditors’ meetings is usually the prospective schememanager or his/her nominee.

The conduct of the creditors’ meeting is the second stage of thesection 210 process. At the creditors’ meeting, the approval by amajority in number representing 75% in value of the creditors’claims must be obtained, either voting in person or by proxy, toapprove the compromise or arrangement. Unanimous consent of

the creditors is therefore not required. Upon approval by thecourt, the terms of the compromise or arrangement will bebinding on all creditors, including secured creditors, whose rightsare affected by the compromise or arrangement. However, thereis nothing to stop the secured creditors from realising theirsecured assets or the unsecured creditors from bringing actionsagainst the company while the company is still undergoingrestructuring, unless a court order is sought and granted torestrain legal proceedings from being taken against the companyonce a scheme of arrangement is proposed.

After the creditors’ meetings have been conducted, the third andfinal stage is the application to Court for the approval of thescheme. In determining whether to approve the compromise orarrangement, the court must be satisfied of the following matters:-

(a) whether the statutory provisions have been complied with(i.e. whether the creditors’ meetings have been held inaccordance with the terms of the Court order granting leaveto convene the said meetings);

(b) whether those who attended the creditors’ meetings werefairly representative of the class of creditors (or members asthe case may be) and that the statutory majority did notcoerce the minority in order to promote the interests adverseto the those of the class whom the statutory majoritypurported to represent; and

(c) whether the scheme is one that a reasonable creditor ormember, being a member of the class concerned and actingin respect of his interest, would approve.



If the Court is satisfied of the above matters, it will approve theproposed scheme of arrangement (the “Sanction Order”). Thescheme will become effective and binding on all parties upon thelodgement of the Sanction Order with the Registrar ofCompanies and Businesses.

Both reconstructions (i.e. the rationalisation of operations by thetransferring of assets and liabilities between related companies)and mergers may be effected through a scheme of arrangementunder section 210. The court has the power to make orders tofacilitate reconstructions and mergers in relation to companiesincorporated in Singapore.

A foreign company may be subject to a Singapore scheme ofarrangement if there is sufficient nexus between the foreigncompany and Singapore and a reasonable possibility that thecompany’s creditors will benefit from the scheme.

A scheme of arrangement may be proposed by the company,any member, any creditor, a judicial manager (if the company hasbeen placed in judicial management) or a liquidator (if thecompany is being wound up).

Liquidation - voluntary winding upThere are two types of voluntary winding up, a members’voluntary winding up and a creditors’ voluntary winding up, theessential difference being that the former applies to solventcompanies and the latter to insolvent companies. Accordingly,voluntary liquidation is not always an insolvency procedure and isnot dealt with in any detail in this note.

Liquidation - Creditors’ voluntary winding upIf the company is unable to pay its debts, the company canconvene a creditors’ meeting to consider the voluntary windingup of the company.

If the directors consider that the company cannot pay its debt,they can resolve that the company be placed in an insolventliquidation. A members’ meeting would be held and if themembers resolve to wind up the company, they will also appointa liquidator, subject to any preference the creditors may have asto choice of liquidator. Usually, the business of the company willcease to operate once winding up commences. Creditors arerequired to provide their proofs of debt on the commencement ofthe winding up process.

In urgent cases, the board of directors can resolve to place thecompany into liquidation and appoint a liquidator immediately.The decision must later be ratified by the subsequent resolutionsof the members and creditors. The commencement of thewinding up is deemed to be at the time of passing of theresolution to wind up. The resolution must be filed with theRegistrar of Companies within seven days. Other than in urgentcases, the company must give notice of the resolution in one ormore newspapers circulated in Singapore within 10 days of theresolution to wind up.

Where a company is already in voluntary winding up, the Courtmay still grant leave to wind up the company compulsorily if it issatisfied that it is necessary to do so in the interests of thecompany’s creditors and contributories.



Liquidation - Compulsory winding upThe company, creditors, contributories, liquidator, judicialmanager, or the Minister may present an application to the courtto wind up the company. The court may order a winding up ofthe company on various grounds including (amongst others):

(a) where the company is unable to pay its debts as and whenthey fall due;

(b) where the court is of the opinion that it is just and equitablethat the company be wound up;

(c) an inspector, appointed under Part IX, has reported thatthe company is unable to pay its debts or it is in thepublic’s interest that the company be wound up.

Once the order is granted, the court may appoint the officialreceiver or an approved company auditor to act as theliquidator. Usually the party presenting the winding upapplication will nominate the liquidator and a court order willmake the appointment. If a liquidator is not appointed whenthe winding up order is made, the Official Receiver will becomethe provisional liquidator until such other person is appointedas the liquidator of the company.

The liquidator will assume custody of the company’s property,carry on the company’s business and endeavour to repay thecreditors’ debts.

Liquidation of a foreign companySection 377 of the Companies Act governs the cessation ofbusiness in Singapore of a foreign company that is registered

in Singapore, for example, where it operates through a branchin Singapore. A foreign company has an obligation to notify theRegistrar of Companies where the foreign company ceases tocarry on business in Singapore or goes into liquidation in itsplace of incorporation.

Liability of Directors of the Company inLiquidationDirectors of a company in liquidation may incur civil andcriminal liability in certain instances.

The Companies Act imposes criminal liability on directors of acompany who will be liable to a fine of up to SGD10,000 or upto two years’ imprisonment. Criminal sanctions do howeverrequire an intention to defraud and therefore an officer whoacted honestly could be regarded as having a valid defence.

The circumstances in which a director may be criminallyliable include:

(a) failure to disclose fully to the liquidator all property ofthe company;

(b) failure to deliver up property, books or papers of thecompany in his custody or possession;

(c) within 12 months prior to the commencement of thewinding up or at any time thereafter, concealment of anyproperty of the company or any debt due to or from thecompany to the value of SGD200 or upwards;

(d) within 12 months prior to the commencement of thewinding up or at any time thereafter, fraudulent removal of



any property of the company to the value of SGD200 orupwards; or

(e) destruction, mutilation, alteration or falsification of anybooks or papers belonging to the company.

In addition to criminal liability, a director may be personallyliable for the debts and liabilities of the company if he or she isfound to be responsible for the carrying on of the business of acompany with the intent to defraud creditors or for anyfraudulent purpose.

A director may also be liable to compensate the company if heor she has misapplied or retained or becomes liable forcompany property or is guilty of any misfeasance or breach oftrust or duty in relation to the company.

Challenges to Antecedent TransactionsTransactions at an Undervalue A liquidator may apply to the court to set aside transactions atan undervalue entered into within five years prior to the onset ofinsolvency. For this purpose a transaction is at an undervalue ifit constitutes a gift or if the value of the consideration received(in money or moneys worth) is significantly less than theconsideration provided by the company.

The transaction however will not be set aside if the court issatisfied that the relevant transaction was entered into in good faithand there were reasonable grounds for believing the transactionwould benefit the company. The grant of security may possibly bethe subject of a challenge as a transaction at undervalue.

Unfair Preference TransactionsA liquidator may apply to set aside transactions which occurredwithin six months prior to the onset of insolvency (this period isextended to two years for transactions involving connectedparties) which had the effect of putting the creditor, surety orguarantor in a better position in the liquidation than wouldotherwise have been the case. A company must have beeninfluenced in deciding to give the preference by a desire toproduce the effect of putting the creditor in a better position. Ifthis desire is missing the transaction will not be invalidated.

Priority of claimsA secured creditor need not prove for its debt and can realiseits security despite the commencement of liquidationproceedings. If the security is inadequate, the secured creditoris entitled to prove in liquidation for the balance due as anunsecured debt. All unsecured creditors will have to lodge aproof of debt with the liquidator.

Generally, the order of priority for the distribution of the assetsof a company in liquidation is as follows:

(a) secured creditors;

(b) liquidator’s costs and remuneration, and the cost ofrealising charged assets;

(c) preferential creditors (may be paid out of floating chargeassets, where there are insufficient unencumbered assets);

(d) unsecured creditors;

(e) members of the company.



GuaranteesGuarantees are available in most circumstances, for exampledownstream, upstream or cross-stream guarantees. Corporatebenefit issues need to be addressed especially in the contextof upstream and cross-stream guarantees.

A guarantee is a secondary obligation by a third party relatingto a primary obligation by a contracting party (i.e. a borrowerunder a loan agreement). If the primary obligation is altered,discharged or fails, the guarantee may not be enforceable.

Guarantees may be challenged and set aside if they amount toan unfair preference transaction.

New Money LendingIn a scheme of arrangement or reconstruction or judicialmanagement, the company may be able to obtain additionallending which is accorded a priority of return, if sucharrangements are approved by the Court or agreed amongstthe creditors. This priority of return may be achieved throughadditional security, or where the creditors first apply moneysreceived from the company in repayment of the new monieslent to the company.

Lender liabilityA lender may possibly be held to be liable to pay thecompany’s debts if it was found to be acting as a shadowdirector of the company. A shadow director is considered to

be a director, as the definition of a “director” in the CompaniesAct includes “a person in accordance with whose directions orinstructions the directors of a corporation are accustomed toact”. The liquidator is able to apply to the Court to make anyperson who was party to carrying on the company’s businessin a fraudulent manner liable for the company’s debts. If thelender, as shadow director, has authorised the contracting of adebt when it had no reasonable expectation of the debt beingrepaid, the liquidator may apply to the Court to make thelender liable to pay that debt. However, the burden of provingfraudulent intent to establish such fraudulent trading isgenerally difficult to discharge.

Cross-Border AssistanceSingapore is not a signatory to the Model Law or to any otherinternational treaties relating to cross-border insolvency. Thecurrent practice in Singapore in relation to rendering assistancein cross-border insolvencies rests on judicial discretion. Thereare, however, general provisions that allow the Singaporecourts to assist a foreign party to enforce a foreign judgmentand to obtain evidence required for the purposes of civilproceedings that may be useful in cross-border reorganisationand rescue matters.

Upcoming changesThe Government has set up the Singapore OmnibusInsolvency Legislation Committee which is designed to lookinto streamlining the existing personal bankruptcy andcorporate insolvency regimes into an omnibus insolvency act.



The Minister of Law has also commissioned an Insolvency LawReview Committee comprising experienced insolvencypractitioners to carry out a review of Singapore’s insolvencyregime. Among the issues under study is how to deal withcross-border insolvency. The findings of the Committee areexpected to be released for public consultation in due course.




Taiwan


IntroductionThis section is designed to provide a general outline of the maincorporate insolvency procedures available in Taiwan. Most of thelegislation relevant to insolvency is contained in the CompanyLaw (1929) and the Bankruptcy Law (1935). Under theCompany Law, the terms “insolvency” and “bankruptcy” areused interchangeably.

The Taiwanese government and legislature have for several yearsbeen in the process of reviewing draft amendments to theBankruptcy Law which, if enacted, would rename the law as the“Debt Clearance Law” and incorporate the reorganisationprovisions currently found in the Company Law into the renamedAct. The new legislation was made public for comment onJanuary 29, 2007. However, the current status of the proposedlegislation is unclear, and there is no reliable time line as towhether and when it may be enacted.

Under the existing legislation, there are four types of insolvencyproceedings available in Taiwan:

(1) Composition;

(2) Reorganisation;

(3) Bankruptcy; and

(4) Special liquidation.

Composition proceedings are conducted with the involvement ofeither the court or a local chamber of commerce, whilst the otherproceedings are required to be supervised by the court. The aimof the composition and reorganisation processes is to rehabilitatethe entity.

There are also specific regulatory actions which may be taken tooverride general insolvency proceedings where the insolvent entityis in certain industries such as the banking or insurance industries.Such regulatory actions are beyond the scope of this note.

CompositionComposition allows for the compromise of debts by agreementamong the creditors. Accordingly, there is no need to obtain aformal court order declaring the company bankrupt. A compositionis only available where there is more than one creditor.

An application for a composition may only be made by thecompany where it is unable to pay its debts. The court willconsider a company’s failure to pay its debts as evidence of aninability to satisfy its debt. The company may apply to the court(or the local chamber of commerce) for a supervisedcomposition. The company must include a statement of affairsand a proposal for satisfying the creditors’ claims. The courtmust either approve or dismiss the application for compositionproceedings within seven days of receiving the application. Noappeal against this ruling is allowed.

TaiwanContributed by Russin & Vecchi

Key Elements:n Composition and reorganisation procedures focus on

company rehabilitation

n Moratorium available

n Director liability


Thomas H. McGowan/Kelly T.Y. Liu9/F., No.205, Tun Hwa N. Rd. Taipei, Taiwan R.O.C.T: +886 2 2712 8956F: +886 2 2713 4711www.russinvecchi.com.tw


If the court approves the application, it will provide notice to thepublic of the approval, following which creditors are required toregister their claims. Within one month after the expiration of thecreditors’ registration period, a creditors’ meeting must be held toaccept the composition. A resolution to accept the compositionrequires a majority vote of creditors present at the creditors’meeting holding at least two-thirds of the total unsecured debts.The resolution of composition is then subject to court approval.

Once the composition is approved, the court will typicallydesignate a judge to supervise the implementation of thecomposition arrangement and select up to two assistantsupervisors from among chartered public accountants,persons designated by the local chamber of commerce orother appropriate persons. The primary duty of the assistantsupervisors is to ensure that no action is taken to prejudice theinterests of creditors. The company will then continue businessunder its incumbent management acting under the supervisionof the supervisors.

An appeal against the approval of the resolution of compositionmay be filed with the court. This appeal, however, is onlyavailable for creditors who have previously objected to the courtin relation to the composition, or whose participation in thecomposition has been rejected.

During the composition period, secured creditors are free toenforce their security. A moratorium, however, is effective inrespect of unsecured creditors. All existing compulsory executionproceedings initiated by unsecured creditors are suspended. Anydebts incurred after the commencement of the composition arenot affected by the moratorium period.

If a court dismisses a composition application or does notapprove the resolution of composition, the court has discretion toorder the commencement of bankruptcy procedures.

A company is also permitted, without first applying to thecourt for composition or bankruptcy, to apply directly to thelocal chamber of commerce for a supervised composition.Certain (but not all) provisions with respect to the compositionprocedure supervised by the court (e.g. the process, reasonsfor dismissal of composition application, restriction oncompulsory enforcement, and effect of the resolution ofcomposition approved by the court) are generally applicable tothe composition procedure supervised by the local chamberof commerce.

A resolution of composition approved by the court is generallybinding on all creditors whose claims arise before the compositionapplication was made.

ReorganisationReorganisation is principally a procedure intended to rescuecompanies which are or may become insolvent. The process isavailable exclusively to companies with publically listed shares orcorporate bonds in circumstances where the company suspendsits business due to financial difficulties, or where there isapprehension that the business will be suspended due tofinancial difficulties. The reorganisation procedure is initiated byan application to the court by the company or its directors,shareholders holding at least 10% of the total shares for not lessthan six months, or creditors whose claims are equivalent to atleast 10% of the total share capital.



A court is required to issue a reorganisation ruling to approve ordismiss an application for reorganisation within 120 days ofreceiving the application. The 120-day period may be extendedtwice provided that each such extension is not permitted toexceed 30 days. A company is not eligible to apply for, and thecourt will not approve a reorganisation where there is nopossibility that the company will be able to rehabilitate itself. Acourt will dismiss an application for reorganisation if the insolventcompany fails to meet the statutory requirements – in particular, ifthe company fails to comply with the application procedure, if thecompany is not a publicly listed company, if the company hasbeen declared bankrupt by the court, if the company hasreached a resolution of composition as stated above, if thecompany has been dissolved or if the company has beensuspended from business and required to clear its debts.

Prior to the court approving the reorganisation, the company orcertain interested parties (being creditors or shareholders of acertain percentage) may apply to have the company’s assetspreserved for a period of up to 90 days (which may be extendedonce for an additional 90 days).

Once an application for reorganisation is approved by the court, anybankruptcy, composition and/or litigation proceedings (includingcompulsory execution against the company) is suspended.

On appointment of an administrator the directors are displacedand their powers of management are vested in the administrator.All creditors (including creditors with priority, secured creditorsand unsecured creditors) and shareholders are required toregister their claims or shareholder rights, within the time limit andat the place set out in the reorganisation ruling, to participate in

the reorganisation procedure and exercise their rights. Unlikebankruptcy, creditors with priority and secured creditors are notexempt from registering their claims in a reorganisation.

An administrator must prepare a restructuring plan which issubject to (i) the approval of meetings of each interested partygroup (i.e. creditors with priority, secured creditors, unsecuredcreditors and shareholders) requiring approval by majority vote ofeach group (voting within the creditor groups is weighted by theamount of debt, while voting within the shareholder group isweighted by the number of shares held) and (ii) the approval bythe court. However, if the company has negative net worth,shareholders lose their rights to vote over the plan.

If a restructuring plan is not approved by the interested parties,the court may order revisions of the restructuring plan and orderthe interested parties to vote again on the revised plan within onemonth. If the revised plan is still not acceptable to the interestedparties, the court is required to terminate the reorganisationprocedure and, if the company meets the bankruptcyrequirements, declare the company bankrupt.

Upon completion of a reorganisation of a company:

(i) all unregistered claims and those registered claims which arenot provided for in the plan are extinguished;

(ii) unregistered shareholder rights and shareholder rights whichare reduced or cancelled by the plan are extinguished; and

(iii) any bankruptcy, composition, compulsory execution and otherlitigation proceedings against the property of the companycommenced prior to the completion become ineffective.



Corporate reorganisation is a lengthy process and has beenabused by companies which have used the procedure as anegotiation tool to reduce the amount of debt and/or interest owedto creditors. Accordingly, this process is not favoured by creditors.

Bankruptcy/LiquidationBankruptcy is declared against a company that is unable to payits debts, and the bankrupt company loses the right to manageand dispose of property forming part of the bankrupt estate.These powers vest in the trustee or liquidator of the companyupon a declaration of bankruptcy.

If a company’s assets are not sufficient to satisfy its debts, theliquidator is required to apply to the court to declare thecompany bankrupt.

The court will regard a failure by the company to pay its debts asevidence that the company is unable to satisfy its debts. Abankruptcy application may be lodged at any time by the companyor a creditor, including during the composition procedure. The courtis required to declare the company bankrupt or dismiss theapplication for bankruptcy within seven days (which may beextended once for an additional seven days) of receiving theapplication. The court will dismiss the application if (i) it forms theview that there is a possibility of a successful composition or, (ii) thecourt finds through investigation that the bankruptcy proceedingwould generate no benefit to a large majority of creditors given thatthe company has no assets or only nominal assets which areinsufficient to pay even the bankruptcy trustee’s fees.

Where a company is declared bankrupt, all pending litigationproceedings against the property of the insolvent company aresuspended and a trustee in bankruptcy will be appointed by the

court. The court is also required to state in the bankruptcydeclaration, a period of between 15 days and 3 months forunsecured creditors to register claims (secured creditors are exemptfrom such registration requirement). Unregistered unsecuredcreditors are unable to share in the proceeds of the liquidatedcompany. The trustee will prepare a list of creditors’ claims.A creditors’ meeting will be called by the court on the application ofthe trustee in bankruptcy, where resolutions may be passed:

(a) electing one or more supervisors to represent the creditors inthe bankruptcy process;

(b) prescribing the method of the administration of the bankrupt’sestate; and

(c) determining whether the business of the bankruptshould continue.

To carry, the resolution generally requires the consent by amajority vote of creditors present at the creditors meeting holdingmore than one-half of the total claim amount (which refers to thetotal “registered” claim amount).

Distributions are made on a pro rata basis. Secured creditors,however, have exclusive rights in respect of the secured propertyand are free to enforce against the secured property throughforeclosure anytime throughout the bankruptcy proceedings.Trustee fees, debts arising out of actions taken by the trustee forthe management of the debtor property during the bankruptcyprocedure, tax claims and employee claims enjoy priority over theclaims of unsecured creditors in the distribution of proceeds.

The trustee or assistant supervisors may be punished forsoliciting or receiving bribes or other unjust interests.



Special LiquidationThe court may, at its discretion or acting upon the petition of theregular liquidator, shareholder or creditor, order a special liquidation.This is performed in circumstances where a company has beenplaced into liquidation and there is difficulty in conducting aliquidation or doubts as to the accuracy of the company’s books.

The effect of a special liquidation is that the liquidator will takeover the management of the company. No business activity canbe carried on unless it is necessary for the liquidation. Theliquidator, within the claim registration period, is not able to makepayments to unsecured creditors but may, with the court’sapproval, pay secured claims.

Subject to the rights of secured creditors and preferentialcreditors, distributions are made on a pro rata basis. During aspecial liquidation, unsecured creditors’ meetings may be held atthe liquidator’s discretion or upon the request of unsecuredcreditors representing not less than 10% of the total unsecureddebts of the company. The liquidator may propose an agreementof settlement to be approved in an unsecured creditors’ meetingattended by unsecured creditors representing more than one-halfof the unsecured debts and approved by unsecured creditorsrepresenting not less than three quarters of the total unsecureddebts. If an agreement of settlement is not approved or is notfeasible, the court has discretion to order the commencement ofthe bankruptcy procedures.

Challenges to Antecedent TransactionsDuring the bankruptcy procedure, the trustee has the power todisclaim (i) any agreements made by the company prior to thedeclaration of bankruptcy that are considered detrimental to

creditors, or (ii) guarantees made within the six month period priorto the adjudication of bankruptcy. The trustee may recover anyundue payment made within the six month period prior to thedeclaration of bankruptcy. The trustee also has the power todisclaim any lease contract entered into by the company aslessee, and the lessor has no remedy in such event. There are noother specific provisions providing a basis to challenge antecedenttransactions except for general Civil Code rights of revocation.

Enforcement process by Secured CreditorsOnce insolvency proceedings (other than a reorganisation) havebeen commenced, a moratorium comes into effect but it doesnot prevent secured creditors from enforcing their security. Wherereorganisation proceedings are underway, secured creditors aregenerally barred from enforcing their security over propertythrough foreclosure.

Personal Liability of DirectorsAs a general rule, directors of a company do not have personalliability for the debts of the company. However, in connectionwith a reorganisation, a director of the company (as well as thesupervisor, manager or other staff) will be liable to one-yearimprisonment, retention and/or criminal fines if he or she engagesin any of the following:

(a) refusing to transfer the management of business or propertyto the administrator;

(b) hiding or destroying the account records in relation to thecompany’s business or financial status;

(c) hiding or disposing the company’s assets or engaging in anydisposal which is detrimental to creditors;



(d) refusing to respond to the administrator’s inquiry as to thecompany’s business and financial status without justifiablereasons; or

(e) fabrication of debts or acknowledgement of untrue debts.

A director of the company under a composition or bankruptcyprocedure is liable to the following:

(a) one-year imprisonment if the director violates its obligation toprovide or transfer the statements or account records to thetrustee, refuses to respond to the trustee’s inquiry or makes afalse statement to the trustee;

(b) five-year imprisonment if, within one year before thebankruptcy declaration or during the bankruptcy proceedings,the company is found to petition a bankruptcy in fraud withthe intent to damage the creditors;

(c) five-year imprisonment if the company is found to apply for acomposition in fraud with the intent to damage the creditorsafter its approval of the composition; and

(d) one-year imprisonment if, within one year before thedeclaration of bankruptcy, the company (i) wastes the assets ofor improperly increases the company’s debt, (ii) assumesdebts, makes purchases or disposes of goods under termswhich are disadvantageous to the company with the intentionto delay the bankruptcy, (iii) provides collateral where there isno obligation to provide collateral or incurs fraudulent debts infavor of specific creditors with the knowledge that the companyis in bankruptcy (iv) releases debts with no due consideration.

Lender LiabilityAt present there are no laws, regulations or courtprecedents imposing liability on lenders in connection withinsolvency proceedings.

GuaranteesUnder Taiwanese law, creditors’ rights against guarantors of theinsolvent company’s debts and joint-debtors with the insolventcompany will not be affected by the composition orreorganisation procedure.

New Money LendingThe administrator of a reorganisation procedure and a liquidatorof a special liquidation procedure, subject to the consent of thesupervisor, are permitted to borrow money on behalf of theinsolvent company. Any borrowings and other debts incurred forthe purpose of maintaining the company’s business during thereorganisation procedure will have priority over other unsecureddebts of the company. Debts arising out of any action taken bythe trustee for the management of the debtor’s property duringthe bankruptcy procedure will also have priority over otherunsecured debts of the company.

Recognition of Foreign InsolvencyProceedings In principle, a foreign final judgment or ruling, subject to certainconditions, will be recognised by Taiwan. However, TaiwaneseBankruptcy Law states that a composition reached in a foreigncountry or a bankruptcy declared in a foreign country does nothave any influence on the company’s property located within theterritory of the Republic of China.






Thailand


IntroductionThis section provides a general outline of the main corporateinsolvency procedures in Thailand. Corporate insolvency inThailand is principally governed by the Bankruptcy Act 1940(last amended in 2004) (the “Bankruptcy Act”) and the Civil andCommercial Code (“CCC”).


(1) bankruptcy (including composition); and

(2) business rehabilitation.

A debtor or its creditors may file for business rehabilitation.Bankruptcy, on the other hand, may only be initiated by creditors.

The competent body to exercise jurisdiction in insolvency mattersis the Central Bankruptcy Court (the “Court”). A solvent liquidationmay be undertaken by any person. An insolvent liquidation,however, may only be conducted by the official receiver. Thai lawdoes not provide for a voluntary bankruptcy procedure.

This note will not cover solvent winding up procedures or thebankruptcy of individuals.

Insolvency TestThe debtor is presumed to be insolvent where:

(1) The debtor declares to the Court or informs its creditors thatit cannot pay its debts.

(2) The debtor has submitted a proposal for composition of itsdebt to two or more creditors.

(3) The debtor has received not less than 2 demand letterswithin 30 days and has not yet paid a sum according tothe demand.

In addition to the tests relating to failure to pay, a debtor will alsobe deemed insolvent where:

(a) The debtor has transferred its assets or the rights to manageits assets to another person for the benefit of that otherperson’s creditors.

(b) The debtor has transferred or delivered its assets withdishonesty or fraudulent intent.

(c) The debtor has transferred or created rights which would,in the situation of bankruptcy, be considered an actof preference.

(d) The debtor has delayed its payment by closing itsbusiness, consented to a judgment order for a paymentwhich it should not pay, or has removed assets out of thecourt’s jurisdiction.

(e) The debtor’s assets are attached under a writ of execution,or there are no assets capable of attachment.

ThailandContributed by Clifford Chance (Bangkok office)

Key Elements:n Automatic moratorium for business rehabilitation

n No voluntary bankruptcy procedure available to debtors

n Insolvency procedures are conducted or supervised byofficial receivers



BankruptcyIf a creditor is owed more than THB2,000,000 by a debtorcompany, it may commence bankruptcy proceedings againstthe insolvent debtor by filing a petition or claim with the Court.The main objective of bankruptcy is to place the debtor intoreceivership and appoint an official receiver to liquidate thedebtor and distribute the proceeds to creditors.

Appointment of Official ReceiverThe court will schedule a preliminary hearing date, usually six weeksafter the claim is filed with the court, to examine witnesses andschedule future hearing dates for a trial. If, by the end of the trial,the Court issues an absolute receivership order, it will be publishedin the Thai Government Gazette and at least one daily newspaper.

Once a receivership order is issued, the debtor is prohibitedfrom dealing with its assets except by order of the Court or withthe approval of the official receiver or the creditors (provided at acreditors’ meeting). Only the Minister of Justice can appoint anofficial to be an official receiver.

Eligible creditors must file a claim within two months from thedate of publication of the order of absolute receivership.Non-resident creditors may be granted a further two monthextension, however they must prove that Thai creditors enjoyreciprocal rights to participate in proceedings in their respectivecountries, and must agree to relinquish any property of thedebtor outside Thailand for the benefit of all creditors.

A creditor cannot file a claim for the repayment of a debt wherethe creditor knew the debtor was insolvent at the time the debtwas incurred, unless the debt was incurred in order for thedebtor’s business to be able to continue its operations.

Functions and Duties of the Official ReceiverThe official receiver will examine all claims submitted by thecreditors and consider whether to accept or reject such claims.Afterwards, the official receiver will report its opinion and sendthe file of such claims to the Court. If there is no objection bythe debtor, its creditors or the official receiver, the Court willapprove the filed claims.

The official receiver will automatically be empowered to takecontrol of the debtor and manage the debtor’s business,including taking custody of its property and acting on behalf ofthe debtor in civil actions. The official receiver can also callcreditors’ meetings and offer a compromise for the settlement ofdebts with the debtor’s creditors.

If the creditors decide that the debtor should be declaredbankrupt, the Court will issue a bankruptcy order and theliquidation process will commence. The proceeds from therealisation of the debtor’s assets by the official receiver will thenbe distributed to the creditors in the following order of priority(on a pro-rata basis if proceeds are insufficient for any category):

(a) official receiver’s costs and expenses for managing andrealising the debtor’s property;

(b) court fees for collecting the debtor’s property;

(c) fees of the petitioning creditor and counsel’s fees as theCourt or the official receiver may prescribe;

(d) taxes due within six months prior to the court order forreceivership and wages of the debtor’s employees; and

(e) any other debts.



Secured CreditorsSecured creditors are entitled to enforce their security withoutfiling a claim for repayment under the bankruptcy procedure.However, in order to be entitled to vote as a creditor under thebankruptcy procedure, a secured creditor is required to file aclaim for repayment.

CompositionA debtor may submit a proposal for the composition of its debts,whereupon the official receiver must call a creditors’ meeting assoon as possible to consider whether the proposal should beaccepted or whether the debtor should be declared bankrupt.A resolution will carry if approved by creditors representing morethan 50% in number and at least 75% in value.

If the creditors decide that the debtor should be declaredbankrupt, the Court will issue a bankruptcy order and theliquidation process will commence. If the composition plan isaccepted by creditors, it must then be approved by the court atwhich point it will become binding on all creditors. After theCourt approves the composition plan, the debtor will not be atrisk of bankruptcy, other than for claims relating to tax and thedebtor’s fraudulent behavior. At the same time, incumbentmanagement will retain control of the company subject to thedirection of the Court.

Business rehabilitationBusiness rehabilitation is a court-supervised formal attempt torestructure the finances of a distressed enterprise. Theprocedure may be commenced by a debtor, creditor orcompetent governmental authority empowered under the

Bankruptcy Act to supervise certain businesses (for example, theBank of Thailand in respect of a commercial bank). A petition forbusiness rehabilitation may be filed with the Court if the debtor:

n is insolvent; and

n owes at least THB10,000,000 to one or more creditors.

Upon the Court accepting the petition, an official receiver isappointed to supervise the business rehabilitation and anautomatic stay comes into effect. Secured creditors will not beable to enforce their security without court approval. Theautomatic stay will continue until the rehabilitation plan has eitherexpired or been executed.

A Court hearing will be held to determine whether a rehabilitationorder should be made. Factors taken into account include thefinancial status of the debtor and the potential for a successfulrehabilitation of the business.

Once the rehabilitation order is made, the Court will appoint aperson who is generally nominated by the debtor as a planpreparer to formulate and prepare the business rehabilitationplan. If the Court is of the opinion that such person is notsuitable to formulate a plan, the Court will order the officialreceiver to call a creditors’ meeting as soon as possible toconsider a suitable replacement. The automatic stay remains ineffect during this period.

The plan preparer must categorise the creditors into thefollowing separate groups for the purpose of voting for approvalof the business rehabilitation plan



(a) each secured creditor with secured debt equal to or inexcess of 15% of the total debts claimable in the businessrehabilitation process; (b) secured creditors other than those referred to in (a) above;(c) unsecured creditors (who may be further divided into differentsub-categories); and (d) subordinated creditors. Creditors within the same group mustbe treated equally in the business rehabilitation plan.

The proposed plan must be approved by either 75% in value and50% in number of each class of creditors, or 75% in value and50% in number of one class of creditors together with 50% invalue of all creditors.

Creditors with debts that were incurred before the date of therehabilitation order must file their claims with the official receiverwithin one month of the publication of the appointment of theplan preparer in the Royal Gazette.

Where the plan is not approved by creditors, the Court will issuean order canceling the business rehabilitation order and theautomatic stay will cease to apply. The Court may continue anybankruptcy proceedings commenced before the businessrehabilitation procedures began.

If the plan is approved by the creditors and the Court, a planadministrator will be appointed in order to implement theapproved business rehabilitation plan. Under the plan, creditorswill be categorised into several classes with differing treatment inrespect of each class.

Creditors may file a motion with the Court challenging the plan onthe basis that it fails to treat creditors of the same class equitably.

If the business rehabilitation is not successfully implementedwithin the allotted time period, which is usually five years, but upto a maximum of seven years (if two extensions for a period ofone year each are allowed), the Court may declare the debtorbankrupt and order the commencement of liquidation.

Challenges to Voidable TransactionsEach of the official receiver, the plan preparer and the planadministrator have the power to file a motion with the Court foran order to cancel a fraudulent act or undue preference.

A fraudulent act under the CCC is a transaction entered into bythe debtor where the debtor and the counterparty haveknowledge that such action would prejudice other creditors. If thetransaction involves a gratuitous act, only the debtor need haveknowledge that such action would be prejudicial to creditors. Aprejudiced creditor is entitled to request the cancellation of theoffending transaction by the Court of Justice. In addition, underthe Bankruptcy Act, the official receiver, the plan preparer and theplan administrator have the power to file a motion with the Courtfor an order to cancel a fraudulent act if the act took place withinone year prior to the filing of a petition for bankruptcy or businessrehabilitation, or occurred anytime thereafter.

In the case of an undue preference, the official receiver, the planpreparer and the plan administrator have the power to file amotion asking the Court to cancel any transfer of an asset or anyact carried out by the debtor with the intention to give unduepreference to a creditor, where the transfer or act occurred withinthree months (or one year if the transfer/act was done with a“connected person”) prior to the filing of a petition for bankruptcyor business rehabilitation, anytime or thereafter.



Director Liability The Bankruptcy Act states that for a period of one year prior tothe bankruptcy of a debtor or anytime thereafter, but before theissuance of a receivership order, the debtor, an officer, aliquidator, a director, representative or employee of the debtor isliable to imprisonment or a fine for:

(a) fraudulently tampering with accounts or documents relatingto the business of the debtor;

(b) omitting to record material matters or making false entries inthe accounts or documents relating to the debtor’s businessor assets;

(c) pledging, mortgaging or disposing of the property which wasobtained on credit for which the price has not been paid(unless in the ordinary course of business and in the absenceof any intentional fraud); and/or

(d) receiving goods on credit using false pretences.

It should be noted that personal liability may be imposed on adirector by virtue of other laws such as in relation to fraud(Section 341 of the Criminal Code) or where a director does notcomply with obligations under the Determining Offence relating tothe Register Partnership, Limited Partnership, Limited Company,Association and Foundation B.E. 2499. This includes, forexample, a director that does not summon an extraordinarymeeting under the CCC, or conceals from the meeting a materialmatter that relates to the company’s financial statements.

Under the CCC, a director has a duty to conduct the businessof the company with the diligence of a careful businessman. If adirector causes loss to a company through non-compliance with

this duty, the company or its shareholders can claim against thedirector for the loss suffered. Similarly, in relation to a publiccompany, a director has a duty to conduct business incompliance with all laws, the objects and the articles ofassociation of the public company, and the resolutions ofshareholder meetings. Directors must also act in good faith andwith care to preserve the interests of the company. If a directorfails to discharge these duties, the public company or itsshareholders can make a claim against the director.

Where the company is a listed company, the directors must alsocomply with the Securities and Exchange Act which imposes afiduciary duty on directors towards the company, and imposescriminal sanctions if the directors fail to comply.

GuaranteesThere is no restriction that prohibits a Thai company from givinga guarantee if it has the legal capacity to do so and it is withinthe company’s objects. This applies to both upstream anddownstream guarantees. A guarantee given by a bankruptcompany or a company subject to business reorganisation maybe subject to challenge, for example, where it would constitute afraudulent act or an undue preference under the Bankruptcy Act(See Voidable Transactions).

New Money LendingUnless otherwise provided for in the business rehabilitation plan,the status of new funds provided during the rehabilitationprocedure can be separated into the following two categories:

(a) Funds provided during the period between when the Courtissues an order to rehabilitate the business and when the



Court appoints the plan preparer. In order for a creditor to beentitled to repayment, the debt must only be incurred by theofficial receiver or interim executive, and the creditor musthave a letter confirming the claims issued by the plan preparer.

In this regard, creditors are not required to file a claimpursuant to the procedures under the Bankruptcy Act.Instead, creditors are entitled to repayment according to thetime periods stipulated in the business rehabilitation plan.

(b) Funds provided after the Court approves the plan forbusiness rehabilitation pursuant to the plan. As above,creditors are entitled to repayment in accordance with thebusiness rehabilitation plan and are not required to file a claimpursuant to procedures under the Bankruptcy Act. A creditorwho provides a loan will not be subject to the automatic stayof the Bankruptcy Act and may enforce its rights when thedebt matures.

Lender LiabilityA lender or creditor may attract liability from (i) involvement in afraudulent act, or (ii) earning a benefit that constitutes an unduepreference. The official receiver, the plan preparer and the planadministrator can file a motion with the Court for an order to cancela fraudulent act or undue preference (see Voidable Transactions).

Whether the fraudulent act or undue preference results in liabilityto the creditor will depend on the act itself. For example, if adebtor’s property is transferred to a creditor to prevent the otherlenders from receiving payment, such an act would constitute anoffence by the debtor and this carries a punishment ofimprisonment for a period not exceeding 2 years or a fine notexceeding THB4,000. A creditor will also be deemed to have

committed an offence where it assists or supports the debtor incommitting such an act or takes part in the commission of suchaction.

Moreover, if a creditor helps or supports the debtor to commit afraudulent act or grant an undue preference, and this causes theloss of property or any other right of the other creditors, theoffending creditor may be liable on the basis of tort under theCCC. Aggrieved creditors may take legal action against thecreditor to recover their loss. An example of a fraudulent act isthe creation of a non-existent liability or debt to dilute theproportional rights of the existing creditors.

Cross-border InsolvencyThere is no established procedure or practice regarding therecognition of foreign insolvency proceedings in Thailand.

The Bankruptcy Act clearly states that the receivership of anasset or a bankruptcy action relates only to the assets of thedebtor located within the Kingdom of Thailand. The receivershipof an asset or a bankruptcy action initiated in a foreign countryhas no bearing or effect on the assets of a debtor located in theKingdom of Thailand.

Thailand is not a party to any convention which recognisesforeign judgments, and therefore foreign judgments are notenforceable in Thailand. Thai courts may, however, accept foreignjudgments as evidence for the purposes of local insolvency.






Vietnam


IntroductionThis section provides a general outline of the main corporateinsolvency procedures in Vietnam. The legislation governinginsolvency in Vietnam is set out in:

(1) the Law on Bankruptcy (No. 21-2004-QH11), dated 15 June2004 which came into effect on 15 October 2004(“Bankruptcy Law”). The Bankruptcy Law is the primarysource of insolvency legislation in Vietnam and has beenfurther clarified and added to by a number of implementingregulations and guidelines issued by the Supreme Court, theMinistry of Finance and the Ministry of Justice; and

(2) the Law on Enterprises (No. 60-2005-QH11) dated29 November 2005 which came into effect on July 2006(“Law on Enterprises”). The Law on Enterprise provides thatany enterprise which is in bankruptcy is subject to theBankruptcy Law.

The Law on Bankruptcy applies to enterprises and co-operativesoperating under Vietnamese law. Currently, there is no suchregime which governs the bankruptcy or insolvency of individuals.

The Bankruptcy Law provides for a general bankruptcyprocedure, which is a court supervised process that results in thecourt placing the enterprise into either:

n a “restoration procedure”, a process designed to rehabilitatethe enterprise so that is may continue to operate as a goingconcern; or

n a “liquidation procedure”, which provides for the liquidation ofthe enterprise and the distribution of proceeds to its creditors.

Recent increases in the number of insolvencies in Vietnamhave highlighted shortcomings in the Bankruptcy Law. TheMinistry of Justice recently published a report acknowledging anumber of inadequacies in the Bankruptcy Law and called forthe Government and related bodies (Supreme People’s Court,Ministry of Justice, Supreme People’s Procuracy, Ministry ofFinance and Ministry of Planning and Investment) to cooperateand address such shortcomings. It remains to be seenwhether the report will operate as an impetus for reform of theBankruptcy Law.

Separate regimes govern the bankruptcy procedures relating tocredit institutions, insurance, securities and other financecompanies, and special enterprises directly serving defense andsecurity. Insolvency relating to these types of institutions isbeyond the scope of this note.

Test of InsolvencyPursuant to Article 3 of the Bankruptcy Law, an enterprise isconsidered insolvent if it is “unable to pay the due debts uponrequest by its creditors”. Due debts must be expressly

VietnamContributed by Vilaf, Vietnam International Law Firm

Key Elements:n Rehabilitation procedure focuses on the rescue of

the enterprise

n Asset Administration and Liquidation Team appointed toassist in the supervision of the enterprise

n Test for insolvency requires a failure to pay due debts

n Emergency measures for the benefit of creditors


Tran Tuan Phong, Managing PartnerSuite 603, HCO Building (Melia)44B Ly Thuong Kiet StHanoi, VietnamT: +84 4 3934 8530F: +84 4 3934 8531www.vilaf.com.vn


recognised by the relevant parties, supported by adequatedocumentation and free from dispute.

Bankruptcy ProcedureOn the failure of an enterprise to pay its due debts on request,any unsecured or partially secured creditor (to which a due debtremains unpaid) or any shareholder of the enterprise may file abankruptcy petition with the court. The filing of a bankruptcypetition by a creditor must be supported by documentation thatshows the creditor has made a request to the enterprise forpayment of a due debt and that the enterprise has failed tocomply with the request. Supporting documentation oftenincludes a written payment demand or an extension of paymentterms offered by the creditor.

Accordingly:

(a) an enterprise will not be insolvent unless its debts have fallendue, even if the enterprise is insolvent on a cash-flow orbalance sheet basis;

(b) when considering a bankruptcy petition, the court willconsider whether the enterprise has been given adequateopportunity by its creditors to agree on the extension ofpayment terms and/or to arrange sufficient financial resourcesto pay its creditors; and

(c) an enterprise will only be deemed insolvent where theenterprise fails to pay its due debts and its creditors do notagree to any further payment extensions.

Milestones in the Bankruptcy ProcedureThe bankruptcy procedure in Vietnam is as follows:

(a) the filing of a bankruptcy petition with the court;

(b) acceptance or rejection of the petition (if the court acceptsthe petition, it has 30 days in which to decide whether or notto commence bankruptcy proceedings);

(c) appointment of the Asset Administration and LiquidationTeam (“AALT”);

(d) first creditors meeting;

(e) either:

(i) the enterprise is placed into the restoration procedurewith a view to restoring the enterprise as a going concern(“Restoration”). If Restoration fails, the court will place theenterprise into liquidation; or

(ii) the enterprise is placed into liquidation with a view torealising the enterprise’s assets and distributing theproceeds to its stakeholders in the relevant order ofpriority (“Liquidation”); and

(f) the final act is a declaration of bankruptcy by the court,

(together the “Bankruptcy Procedures”).

At any stage during the Bankruptcy Procedures, the court mayconvert Restoration proceedings into Liquidation proceedings ordeclare the enterprise bankrupt.



Parties eligible to file bankruptcy petitionsThe following parties may file a petition with the court tocommence the Bankruptcy Procedures against an enterprise:

n the enterprise itself (i.e. the legal representative of theenterprise, who is required to file a petition within threemonths of becoming aware that the enterprise is insolvent);

n a State enterprise owner;

n shareholders or a group of shareholders who have the rightto file a bankruptcy petition as stated in the charter or asresolved in a general meeting of shareholders;

n unsecured or partially secured creditors; and

n employees of the enterprise.

Any person who files a dishonest petition or a petition without duecause together with intention to harm the honour, reputation oroperations of an enterprise, is liable to an administrative penaltyand to compensation for any damage suffered by the enterprise.

Filing and acceptance of a petition for BankruptcyProceduresA petition for Bankruptcy Procedures must be accompanied byevidence of the enterprise’s insolvency status and the applicablefee. An unsecured or partly secured creditor is not required towait until the due date for payment has passed before filing abankruptcy petition if other due debts remain outstanding by theenterprise. A petition may be submitted so long as there is anoutstanding debt and the enterprise is on the verge ofbankruptcy. If the enterprise can prove it is not insolvent, thecourt will reject the petition. If the Court accepts the petition, it

must notify the enterprise within 5 days of acceptance. The Courtwill issue a decision on whether it will initiate the BankruptcyProcedures within 30 days from the date of acceptance of thepetition. Creditors and debtors of the enterprise are also entitledto notice of the decision.

Unsecured or partly secured creditors must submit with theirpetition a list of due debts together with supportingdocumentation of any requests for payment of such debts.

Where the enterprise is on the verge of bankruptcy, a failure bythe enterprise to pay wages and other debts owed to employeesprovides grounds for employees to file a bankruptcy petition.Unpaid employees must itemise in the petition the number ofmonths their salaries remain unpaid and the total amount ofsalaries and other debts which are owed to them.

Applicable CourtPursuant to the Bankruptcy Law, Bankruptcy Procedures are tobe handled by a single judge in the district court, and by a singlejudge or a panel of three judges in a provincial or municipal court.The bankruptcy jurisdiction of the district court is limited toco-operatives whose businesses have been registered in therelevant district.

Commencement of Bankruptcy ProceduresAfter careful consideration of the evidence of the enterprise’sbankruptcy status, the court will decide whether to initiate theBankruptcy Procedures. It is also at this stage that the courtdecides whether to place the enterprise into Restoration,Liquidation or to declare the enterprise bankrupt.



If the court places the enterprise into Restoration, the enterprisemust submit to the court:

(a) a statement of profit and loss explaining the cause of itsunpaid debts;

(b) a report on measures taken to remedy the situation;

(c) a detailed list of the enterprise’s assets;

(d) a list of creditors detailing secured and unsecured debts thatare outstanding and not yet due; and

(e) a list of debtors detailing secured and unsecured debts thatare outstanding and not yet due.

The creditors of the enterprise are also required to submit to thecourt details of their payment requests.

Appointment of Asset Administration and Liquidation TeamAfter the court initiates the Bankruptcy Procedures, anenterprise may continue to conduct its business under thesupervision of the court and the AALT. The AALT is establishedafter a petition to commence Bankruptcy Procedures isaccepted by the court and is comprised of a bailiff, arepresentative of the creditors, a legal representative of theenterprise, and subject to the supervisory judge’s discretion, aunion representative, a representative of employees and arepresentative of an expert institution.

The court may also appoint a person as manager and operatorof the enterprise’s business if the existing management lack theability to operate the business or where allowing the existing

management to continue would put the preservation of theenterprise’s assets at risk.

The AALT is responsible for supervising incumbent managementin organising and managing the assets of an enterprise that hasbeen placed into the Bankruptcy Procedure and serves as anintermediary between the court, the enterprise and its creditors.The AALT also advises the court on matters related to theRestoration, Liquidation or bankruptcy of the enterprise andcarries out any court orders regarding the liquidation of assets.

The following assets form the bankrupt estate of the enterpriseand are dealt with according to the Bankruptcy Procedures:

(a) assets and rights to assets which the business had at thetime the court accepted the bankruptcy petition;

(b) profits, assets and rights to assets which the business hadprior to the court accepting the bankruptcy petition;

(c) if a secured party is over-collateralised, then the excessproceeds from the sale of the secured asset will constitute anasset of the business and be subject to the BankruptcyProcedures; and

(d) the value of any land use rights.

Permitted business activities during BankruptcyProceduresAlthough the enterprise may continue as usual during theBankruptcy Procedure, it will be subject to the supervision of thecourt and the AALT. During the operation of the Bankruptcy



Procedures the enterprise may not, without prior written consentof the court:

(a) pledge, mortgage, assign, sell, donate or lease any asset;

(b) receive assigned assets;

(c) terminate performance of a valid contract;

(d) borrow any loan monies;

(e) sell or convert shares or transfer ownership rights of anyassets; or

(f) pay any new debt arising from business activities or wagesof employees.

After commencement of the Bankruptcy Procedures, theenterprise is prohibited from:

(a) concealing or disposing of assets;

(b) paying any unsecured debt;

(c) abandoning or reducing any right to claim a debt; and

(d) converting unsecured debts into debts secured by assets ofthe enterprise.

Moratorium during Bankruptcy ProceduresAn automatic moratorium arises from the date a bankruptcypetition is filed with the court, during which time no proceedingsby unsecured creditors may be commenced or continued.Similarly, secured creditors may only enforce their security withthe approval of the court.

Restoration ProcedureWith information from both the enterprise and its creditors athand, the court will convene a meeting of the enterprise’screditors to:

(a) discuss the enterprise’s financial situation;

(b) if the creditors consider that the enterprise is recoverable,approve a resolution to recover the enterprise’s business; and

(c) place the enterprise into Restoration.

If the creditors consider that the enterprise’s business is notrecoverable, then the court will place the enterprise into Liquidation.

The Restoration procedure commences upon the courtaccepting the creditors’ decision to restructure the enterprise’sbusiness. Once the Restoration procedure has been initiated, theenterprise is obliged to submit a plan to rescue the business,detailing how the enterprise intends to repay its debt andrestructure its business operations (“Restoration Plan”). However,a creditor or any other party also has the right to formulate aRestoration Plan for consideration by the court.

The Restoration Plan must identify the measures to be taken forthe recovery of the business operations, including:

(a) raising new sources of capital;

(b) changing production and business goods of an enterprise;

(c) renewing production technology;



(d) restructuring the enterprise’s or the cooperative’s managementapparatus and merging or de-merging production divisions toenhance productivity and production quality;

(e) issuing new shares to creditors;

(f) selling or leasing unnecessary assets; or

(g) other measures not contrary to law.

Once the Restoration Plan has been prepared, it is first submittedto the court for consideration and approval before beingsubmitted to creditors for approval. This requires a vote by amajority of unsecured creditors holding at least two-thirds of thetotal unsecured debt. Once the Restoration Plan receives bothcourt and creditor approval, notice of the approval will be sent toall creditors and published in a newspaper, and the RestorationPlan will become effective.

The Bankruptcy Law provides that the Restoration Plan must beimplemented within three years from the date the notice of theRestoration Plan was published in a newspaper. During thethree year implementation period, the enterprise must submitsemi-annual reports to the court and creditors are under anobligation to supervise the implementation of the Restoration Plan.

Any amendments to the Restoration Plan must be approved bythe requisite majority of creditors and the court.

Secured Creditors in RestorationAn automatic moratorium arises from the date a bankruptcypetition is filed with the court. Secured creditors may only enforcetheir security with the approval of the court.

LiquidationIn a Liquidation, the assets of the enterprise are liquidated andproceeds distributed to its creditors. A court will order theliquidation of an enterprise where:

(a) the Restoration Plan fails such that the enterprise is unable torepay its due debts at the request of its creditors;

(b) the creditors’ meeting is unsuccessful as a result of:

(i) the legal representatives of the enterprise failing toparticipate in the creditors’ meeting without plausiblereasons; or

(ii) the creditors’ meeting failing to achieve quorum after havingalready been adjourned once (where the petitioner is thelegal owner or legal representative of the enterprise); and

(c) after the creditors’ meeting, the requisite majority of creditorshave passed a resolution to develop a Restoration Plan and:

(i) the enterprise fails to formulate a Restoration Plan within30 days of the date on which the initial creditors’ meetingresolved to recover the business;

(ii) the creditors’ meeting rejects a resolution approving theRestoration Plan; or

(iii) the enterprise fails to implement or implements improperlya court-approved Restoration Plan.

A concerned party may appeal the decision to commence theLiquidation procedure.



Priority of claims and distributionThe court must also prescribe a plan for the distribution ofproceeds in accordance with the following priority:

1. fees and costs of the bankruptcy proceedings;

2. unpaid wages, allowances for termination of employment,social insurance, and other interests under signed collectivelabour accords and labour contracts; and

3. unsecured debts, including tax debts, owed to creditorswhose names appear on the list of creditors.

Any balance remaining after all creditors have been paid in full isdistributed to the members or equity holders of the enterprise.The Bankruptcy Law does not address in any detail the processto effect the liquidation/sale of the assets of the enterprise. Alldebts which are undue are dealt with as due debts but there isno entitlement to interest in favour of the enterprise for the periodup to the due date.

Secured Creditors in LiquidationA secured creditor may only enforce its security during theLiquidation procedure with the approval of the court. Priority isgranted to secured creditors subject to such security being inplace prior to the date on which the court accepted the petition.Where the value of the secured assets is insufficient to cover thedebt of a secured creditor, the secured creditor can claim as anunsecured creditor for the shortfall.

Declaration of BankruptcyOnce the Liquidation procedure is complete, the court willdeclare the enterprise bankrupt. Once an enterprise is declared

bankrupt the court will forward the declaration to the businessregistration office for removal of the bankrupt enterprise’s namefrom the business registry.

AALT – Emergency ProceduresThe AALT may apply to the court to seek temporary emergencymeasures to protect the assets of an insolvent enterprise for thebenefit of its creditors. The AALT may seek an order to:

(a) permit the sale of perishable goods, goods near their end ofuse date, or goods which may be difficult to sell unless soldat the right time;

(b) physically secure the assets of the business;

(c) freeze the bank accounts of the business;

(d) secure the funds of the business;

(e) seize the accounting records and related business data; and

(f) prohibit the performance of, or an order for the compulsoryperformance of, a number of specified acts by the businessor by other related individuals or organisations.

Voidable TransactionsThe following transactions are invalid if entered into by aninsolvent enterprise anytime within the three month period priorto the acceptance of a bankruptcy petition by the court:

(a) property donated to other persons;

(b) the entry into any contract in which the obligation of theenterprise was clearly greater than that of the other party;



(c) the payment of debts that at the time of payment werenot due;

(d) the granting of security over assets in respect of existingdebts; or

(e) the entry into any other transaction for the purpose ofdisposing of the assets of the business.

Personal LiabilityFollowing the declaration of an enterprise as bankrupt:

(a) the general directors;

(b) the Chairman;

(c) the members of the board of management (inshareholding companies);

(d) the board members (in limited liability companies);

(e) the owner (in a private enterprise); and

(f) the partners (in a partnership),

of the bankrupt business are prohibited from holding similarpositions in any other business and establishing a business ofany type for one to three years.

The general directors and members of the board of managementof a bankrupt State owned enterprise (“SOE”) with 100% Statecapital will be permanently prohibited from holding the sameposition in any SOE. A person assigned to represent the State’sequity in any enterprise that is declared bankrupt will bepermanently prohibited from holding any managerial position in

any enterprise with State capital. The only exception to theprohibitions discussed above is when the bankruptcy arises dueto reasons of force majeure.

Lender LiabilityThere is no requirement under Vietnamese law which renders alender liable to pay its customers’ debts.

New Money LendingAny new borrowing by an enterprise during the BankruptcyProcedures requires the prior written consent of the court. Thereis no restriction on lenders providing new credit facilities toenterprises that are subject to Bankruptcy Procedures, however itis uncommon for credit institutions to lend money to suchenterprises in these circumstances. When this does occur, asexpected, lending conditions and security requirements are tighter.

GuaranteesVietnamese law allows a party to give a guarantee to secure theperformance of obligations of another party, regardless ofwhether the two parties are related. As long as the guarantee isexecuted in accordance with Vietnamese law (e.g., in writing, andin some circumstances notarised or certified, and signed by anauthorised signatory of the guarantor), the guarantee isenforceable against the guarantor.

The guarantee should explicitly refer to the obligations beingguaranteed and should state that in the event that the principal isunable to perform its obligations owed to the beneficiary, theguarantor will perform the guaranteed obligations in accordance



with the original agreement or on other agreed terms acceptableto the beneficiary.

Recognition of foreign insolvencyproceedingsThere is no formal recognition of foreign insolvency proceedingsby Vietnamese courts. Creditors are required to institute localproceedings or obtain a judgment in a foreign court and seek tohave it recognised by the Vietnamese courts. Only recognisedforeign judgments may be enforced against the assets of anenterprise which are located in Vietnam.

Recognition of a foreign judgmentTo enforce a foreign judgment in Vietnam, the judgment holder(the applicant) must apply to the appropriate Vietnamese court tohave the foreign judgment recognised. This requires submitting arequest to the Ministry of Justice (“MOJ”) together with thedocuments required by the relevant treaty. Within seven days ofreceiving a completed application, the MOJ will transfer the file tothe court authorised to handle such proceedings. The authorisedcourt is required to accept the case for hearing, and apre-hearing will take place within four months from the date ofacceptance of the case. The time limit may be extended by atwo months if the court requires the applicant or the foreign courtwhich handed down the judgment to clarify any unclear issue.During the pre-hearing, the court may suspend the hearing orproceed directly to the hearing. If the court decides to conduct afull hearing, the hearing must commence within one month fromthe date of the court’s decision to do so.

The court will then issue a decision on whether it will recognisethe foreign judgment. The court may decline to recognise theforeign judgment where:

(a) the foreign judgment is not effective according to the law ofthe country where the foreign judgment was made;

(b) the judgment debtor or his or her legal representative did notattend the trial or hearing before the foreign court because heor she was not legally summoned;

(c) the case can only be adjudicated by a Vietnamese court;

(d) the case was also considered by a Vietnamese court and thejudgment issued thereto has become effective;

(e) the case was settled by another foreign court whosejudgment has previously been recognised by theVietnamese court;

(f) the case has previously been accepted and considered by aVietnamese court before the foreign court accepted the caseand handed down its judgment;

(g) the time limit for enforcement of the foreign judgment hasexpired according to the law of the country where the foreignjudgment was made or according to Vietnamese law (whichis currently five years); or

(h) the recognition and enforcement of the foreign judgment inVietnam is contrary to the fundamental principles ofVietnamese law. There is currently no guidance on the typesof claims which might be contrary to the fundamentalprinciples of Vietnamese law.



Enforcement of a foreign judgmentUnder the Civil Procedure Code, a foreign judgment which hasbeen recognised by a Vietnamese court will have the same effectas a judgment rendered by a Vietnamese court. The enforcementof the judgment is governed by the Law on Enforcement.

An application for the enforcement of a judgment must be filedwithin five years from the effective date of the judgment or arbitralaward. Where a time limit for fulfilling an obligation is set out inthe judgment or arbitral award, the five-year time limit will beginfrom the date the obligation is due to be performed. Forjudgments and arbitral awards subject to periodical enforcement,the five-year time limit will apply to each period and be countedfrom the date the obligation is due to be performed.

Judgments of foreign courts and foreign arbitral awardsrecognised by Vietnamese courts must be enforced by therelevant provincial-level enforcement agencies.



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A guide to Asia Pacific restructuring and insolvency procedures

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A guide to Asia Pacific restructuring and insolvency procedures

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APAC R&I G 2013 N B a 29/07/13 12:32 PM Pa 1 · APAC R&I G 2013_N_B a 29/07/13 12:32 PM Pa 8. A guide to Asia Pacific restructuring and insolvency procedures 9 ... o rmg r oss negligence