A guide to Asia Pacific restructuring and insolvency procedures

Transcription

1 A guide to Asia Pacific restructurig ad isolvecy procedures

2 Foreword

3 Foreword We are pleased to itroduce our ew publicatio o restructurig ad isolvecy procedures i the Asia Pacific regio. It is desiged to provide you with our commercial isights ito the matrix of diverse legal systems across the regio. It combies our global stadards of busiess ad law with local excellece to provide you with a resource to meet your eeds whether it be at the outset of a trasactio to esure that it is structured i a way to maximise returs, or whe lookig to exit by miimisig risks ad exposures, wherever they arise. This multi-jurisdictioal guide is just a flavour of the expertise ad techical kowledge that we have accumulated i the regio over the last few decades. Sice the 1997 Asia fiacial crisis, we have had sigificat iput o may of the most promiet restructurigs ad corporate isolvecies ad we cotiue to advise o some of the most iovative ad progressive deals i the Asia Pacific regio. The guide cotais isights ito 13 differet jurisdictios withi the Asia Pacific regio icludig Australia, Chia, Hog Kog SAR, Idia, Japa, ad Sigapore. It aims to assist whe assessig credit risks ad potetial impacts of formal isolvecy procedures o realisig security across the Asia Pacific regio ad cotais a useful comparative table o issues such as the automatic stay, the ability to cram dow dissetiet creditors, ad potetial leder liability. The guide exemplifies the power of collaboratio, collegiality ad teamwork that we have i our offices worldwide ad amogst our preferred firms etwork to esure that you get the widest possible coverage ad i depth local kowledge. I this regard, we would like to ackowledge ad express our sicere gratitude to the followig firms who have kidly cotributed the chapters o Idia, Idoesia, Korea, Philippies, Malaysia, Taiwa ad Vietam: AZB & Parters; Mochtar Karuwi Komar; Bae, Kim & Lee LLC; Chooi & Compay; Belo Gozo Elma Parel Asucio Lucila; Russi & Vecchi; ad Vilaf. Mark Hyde Global Head of Restructurig ad Isolvecy This Guide does ot purport to be comprehesive or costitute legal advice. It is oly a guide. The iformatio ad the laws referred to are correct as of Jue 2013 but may chage quickly. If you would like ay advice or further iformatio o aythig cotaied i this guide, please cotact Clifford Chace. This hadbook is copyrighted material. No copyig, distributio, publishig or other restricted use of this hadbook is permitted without the writte coset of Clifford Chace. A guide to Asia Pacific restructurig ad isolvecy procedures 3

4 Cotets

5 Cotets Compariso table... 6 Australia Chia Hog Kog Idia Idoesia Japa Korea Malaysia The Philippies Sigapore Taiwa Thailad Vietam A guide to Asia Pacific restructurig ad isolvecy procedures 5

6 Compariso table Rehabilitatio, moratoria, eforcemet ad cram dow Australia Chia Hog Kog SAR Idia Idoesia Japa Rehabilitatio procedure available Volutary Admiistratio Rectificatio No statutory process. Provisioal liquidators i some circumstaces are grated powers by the court to formulate restructurig plas. Reorgaisatio Suspesio of Paymets Civil Rehabilitatio Automatic moratorium o claims agaist the compay Volutary Admiistratio Scheme of arragemet Rectificatio Compromise Bakruptcy Provisioal liquidator appoitmet Liquidatio Reorgaisatio Bakruptcy Suspesio of Paymets Corporate Reorgaisatio Civil Rehabilitatio Eforcemet still possible by secured creditors durig moratorium without court approval Volutary Admiistratio: uless iitiated withi 13 days of otice of appoitmet of admiistrator. Rectificatio Compromise Bakruptcy Provisioal liquidator appoitmet Liquidatio Not applicable. Bakruptcy (free to eforce after 90 days). Suspesio of Paymets Bakruptcy Civil Rehabilitatio Corporate Reorgaisatio Cram dow of creditors (votig thresholds required to bid all creditors) Volutary Admiistratio/ Deed of Compay Arragemets: Approval of creditors represetig more tha 50% i umber ad 50% i value. Scheme of Arragemet: Approval of each class of creditors represetig more tha 50% i umber ad 75% i value. Rectificatio: Approval of each class of creditors. Approval of creditors represetig more tha 50% i umber ad 66 2/3 % i value. Court approval required. Compromise: Approval of usecured creditors represetig more tha 50% i umber ad 66 2/3 % i value. Court approval required. Scheme of Arragemet: Approval of each class of creditors represetig more tha 50% i umber ad 75% i value. Court approval required. Reorgaisatio: Approval of creditors represetig more tha 50% i umber ad 75% i value. Suspesio of Debt Paymets: Approval of usecured creditors represetig more tha 50% i umber ad 66 2/3 % i value, ad approval of secured creditors represetig more tha 50% i umber ad 66 2/3 % i value. Civil Rehabilitatio: Approval of creditors represetig more tha 50% i umber ad 50% i value. Corporate Reorgaisatio: Approval required by differet classes of creditors with various majority thresholds. 6 A guide to Asia Pacific restructurig ad isolvecy procedures

7 Korea Malaysia Philippies Sigapore Taiwa Thailad Vietam Corporate Rehabilitatio Scheme of Arragemet Rehabilitatio Judicial Maagemet Scheme of Arragemet Reorgaisatio Compositio Busiess Rehabilitatio Restoratio Procedure Corporate Rehabilitatio Scheme of Arragemet Rehabilitatio Liquidatio Judicial Maagemet Scheme of Arragemet (but available upo Court order) Reorgaisatio Compositio Bakruptcy Busiess Rehabilitatio Restoratio Procedure Bakruptcy Not applicable. Not applicable. Rehabilitatio Liquidatio (free to eforce after 90 days). Rehabilitatio Pla: Approval of secured creditors represetig more tha 75% i value, ad approval of usecured creditors represetig more tha 66 2/3 % i value. Scheme of Arragemet: Approval of each class of creditors represetig more tha 50% i umber ad 75% i value. Rehabilitatio: Approval of each class of creditors represetig more tha 50% i umber. Judicial Reorgaisatio Maagemet Compositio Scheme of Arragemet (if there is o moratorium ordered by the Court) Bakruptcy Scheme of arragemet: Approval of each class of creditors represetig more tha 50% i umber ad 75% i value. Court approval required. Reorgaisatio: Approval of each class of creditors represetig more tha 50% i umber votig. Votig is weighted by the value of debt owed to the creditor. Court approval required. Compositio: Approval of creditors represetig more tha 50% i umber votig ad 66 2/3 % i value. Court approval required. Bakruptcy: Approval of creditors represetig more tha 50% i umber votig ad 50% i value. Court approval required. Busiess Rehabilitatio Busiess Rehabilitatio: Approval of each class of creditors represetig more tha 50% i umber ad at least 75% i value, or approval of oe class of creditors represetig more tha 50% i umber ad at least 75% i value together with at least 50% i value of all creditors. Restoratio Procedure Bakruptcy Restoratio Procedure: Approval of usecured creditors represetig more tha 50% i umber ad 66 2/3 % i value. A guide to Asia Pacific restructurig ad isolvecy procedures 7

8 Maagemet, persoal liability ad court ivolvemet o eforcemet Australia Chia Hog Kog SAR Idia Idoesia Japa Who cotrols the compay ad/or its assets durig the isolvecy procedure? Admiistratio: Admiistrator replaces maagemet. Liquidatio: Liquidator replaces maagemet. Receivership: Receiver ad maager replace maagemet where provided for by debeture. Rectificatio: Court appoited admiistrator replaces maagemet. Icumbet maagemet may apply to the court to cotiue to maage the busiess uder the supervisio of the admiistrator. Compromise: Icumbet maagemet retai cotrol. Bakruptcy: Court appoited admiistrator replaces maagemet. Scheme of arragemet: Icumbet maagemet retai cotrol. Liquidatio: Liquidator replaces maagemet. Reorgaisatio: Subject to Court discretio, icumbet maagemet retais cotrol. Liquidatio: Liquidator replaces maagemet for a volutary widig up. Official Liquidator replaces maagemet for a compulsory widig up. Suspesio of debt paymets: Icumbet maagemet retai cotrol joitly with appoited admiistrator. Supervisory judge appoited. Bakruptcy: Curator replaces maagemet Supervisory judge appoited. Civil Rehabilitatio: Icumbet maagemet may retai cotrol. Usual practice is for a supervisor to be appoited to replace maagemet. Corporate Reorgaisatio: Two trustees replace maagemet. Bakruptcy: Court appoited bakruptcy trustee replaces maagemet. Persoal liability for directors ad officers Liability for: isolvet tradig; breach of duty; fraudulet behavior. Liability for: breach of duty; fraud; misfeasace; isolvet tradig. Liability for: breach of duty; fraudulet tradig; improper accoutig; failure to assist with the liquidatio. Liability for: failure to co-operate with liquidator; fraud o compay; improper accoutig. Liability for: breach of duty; egliget acts cotributig to loss. Liability for: breach of fiduciary duty; breach of obligatio to act as good maagers. Receivership/does eforcemet by secured creditors require court itervetio? Receiver appoited by secured creditor. Not available. Uless the debtor is willig to cooperate, eforcemet of security by secured creditors requires court itervetio. Receiver appoited by secured creditor. Leave of the court required. Court geerally appoits the Official Liquidator as the receiver. Receiver appoited by commercial court. Eforcemet of security by secured creditors ca be doe through public auctio or the secured creditors ca ask for Court assistace. Not available. Uless the debtor is willig to cooperate, eforcemet of security by secured creditors requires court itervetio. 8 A guide to Asia Pacific restructurig ad isolvecy procedures

9 Korea Malaysia Philippies Sigapore Taiwa Thailad Vietam Rehabilitatio Pla: Icumbet maagemet retai cotrol i the absece of ay cause for isolvecy. Bakruptcy: Court appoited receiver replaces maagemet. Receivership: Private receiver replaces maagemet where provided for by debeture. Court appoited receiver replaces maagemet. Liquidatio: Liquidator replaces maagemet. Rehabilitatio: Icumbet maagemet retai cotrol uder supervisio of rehabilitatio receiver ad/or court. Liquidatio: Liquidator replaces maagemet. Receivership: Receiver ad maager replace maagemet where provided for by debeture. Judicial Maagemet: Judicial maager replaces maagemet. Scheme of Arragemet: Icumbet maagemet retai cotrol, subject to the terms of the scheme. Liquidatio: Liquidator replaces maagemet. Reorgaisatio: Admiistrator replaces maagemet (although may be appoited from icumbet maagemet). Compositio: Icumbet maagemet retai cotrol uder the supervisio of a judge ad assistat supervisors. Bakruptcy: Trustee replaces maagemet. Liquidatio: Liquidator replaces maagemet. Busiess Rehabilitatio: Pla preparer/pla admiistrator replaces maagemet. Bakruptcy: Official receiver replaces maagemet. Restoratio Procedure: Asset Admiistratio ad Liquidatio Team replace maagemet. Bakruptcy: Icumbet maagemet retai cotrol uder the supervisio of the Asset Admiistratio ad Liquidatio Team. Liquidatio: Asset Admiistratio ad Liquidatio Team replace maagemet. Liability for: willful miscoduct or gross egligece i cotravetio of Korea law or the compay s articles of icorporatio. Liability for: breach of duty or misfeasace; busiess of the compay which is carried out with a itet to defraud creditors or for a fraudulet purpose; icurrig a debt with o reasoable grouds of expectig that the compay will be able to repay. Liability for: disposals other tha i its ordiary course of busiess; authorisig ay trasactio defraudig creditors; embezzlig or misappropriatig ay property of the compay. Liability for: breach of duty; failure to co-operate with liquidator; fraud o compay; improper accoutig. Liability for: failure to co-operate with the admiistrator/ trustee; fraud o compay; improper accoutig. Liability for: breach of duty; fraud o compay; improper accoutig. Receiver appoited by secured creditor or court. Eforcemet of a fixed statutory charge over lad requires applicatio to the court for itervetio. Not available. Uless the debtor is willig to cooperate, eforcemet of security by secured creditors requires court itervetio. Receiver appoited by secured creditor or court. Not available. Uless the debtor is willig to cooperate, eforcemet of security by secured creditors requires court itervetio. Not available. Uless the debtor is willig to cooperate, eforcemet of security by secured creditors requires court itervetio. Not available. Eforcemet of security by secured creditors requires court itervetio. A guide to Asia Pacific restructurig ad isolvecy procedures 9

10 Claw back risks Australia Chia Hog Kog SAR Idia Idoesia Japa Claw-back periods (the period before the iitiatio of isolvecy procedures i which certai trasactios may be reversed) Isolvet trasactios: 6 moths to 10 years. Ufair loas: o time limit. Ufair prefereces: 6 moths. Trasactios at udervalue: 1 year. Paymet of debts ot due: 1 year. Ufair prefereces: 6 moths. Extortioate credit: 3 years. Avoidace of floatig charges: 1 year. Dispositios to defraud creditors: o time limit. Fraudulet prefereces: 6 moths. Fraudulet trasactios: 1 year. Prefereces: 1 year. 10 A guide to Asia Pacific restructurig ad isolvecy procedures

11 Korea Malaysia Philippies Sigapore Taiwa Thailad Vietam Ufair prefereces: 60 days to 1 year. Trasactios at udervalue: 60 days to 1 year. Fraudulet prefereces: 6 moths. Trasactios at udervalue: 2 years. Trasactios at udervalue: o limit specified. Prefereces: 90 days+. Ufair prefereces: 6 moths to 2 years. Trasactios at udervalue: 5 years. Floatig charges: 6 moths. Applicable durig a Bakruptcy oly: Trasactios detrimetal to creditors: 6 moths. Guaratees: 6 moths. Udue paymets made: 6 moths. Fraudulet trasfers: 1 year. Prefereces: 3 moths. Ufair prefereces: 3 moths. Trasactios at udervalue: 3 moths. A guide to Asia Pacific restructurig ad isolvecy procedures 11

12 Australia 12 A guide to Asia Pacific restructurig ad isolvecy procedures

13 Australia Cotributed by Clifford Chace (Perth ad Sydey offices) Key Elemets: The objective of volutary admiistratio is to facilitate busiess rehabilitatio. The procedure provides for a automatic moratorium o the commecemet of legal proceedigs Receivership is available as a self help remedy for secured creditors Sigificat powers give to isolvecy officeholders to overtur voidable trasactios No restrictios o cotract couterparts from exercisig ipso facto clauses (clauses i cotracts that eable a couterparty to termiate the cotract o the isolvecy of the other party) Oerous isolvet tradig regime: sigificat risks for directors who seek iformal restructurig where compay may be isolvet Itroductio This sectio provides a geeral outlie of the mai corporate isolvecy procedures i Australia. Most of the legislatio relevat to isolvecy is cotaied i the Corporatios Act 2001 (Cth) (Corporatios Act) ad is supplemeted by the Corporatios Regulatios 2001 (Cth). The mai procedures ecoutered i corporate isolvecies are: (1) volutary admiistratio (icludig deeds of compay arragemet); (2) receivership; ad (3) liquidatio. We also cosider very briefly schemes of arragemet, voidable trasactios, the persoal liability of directors, leder liability, guaratees, priority of security ad claims, ew moey ledig ad the recogitio of foreig isolvecy proceedigs. There are also bespoke isolvecy regimes for certai other types of etities, such as isurace compaies (the Life Isurace Act 1995 (Cth) ad Isurace Act 1973 (Cth)) ad baks (the Bakig Act 1959 ad Paymet Systems ad Nettig Act 1998). These special regimes, together with the persoal isolvecy regime, are beyod the scope of this ote. Test of Isolvecy A compay is isolvet if, accordig to the cash flow test, it is uable to pay its debts as ad whe they become due ad payable. This meas that a compay may be isolvet eve if the value of its assets exceeds its liabilities (the balace sheet test ). I practice, the courts assess isolvecy through a cosideratio of the compay s fiacial positio based o commercial reality (havig regard to the prevailig circumstaces at the time such as the expectatio of future cash iflows) ad have held temporary lack of liquidity aloe is isufficiet to coclude that a compay is isolvet. Volutary Admiistratio I Australia at preset, volutary admiistratio is the most commoly used procedure for formal busiess rehabilitatio. Volutary admiistratio ivolves the appoitmet of a idepedet isolvecy practitioer to admiister the busiess with a view to maximisig the chaces of rehabilitatig the busiess either through a compromise implemeted through a A guide to Asia Pacific restructurig ad isolvecy procedures 13

14 deed of compay arragemet or the sale of some or all of the compay s assets. Although the stated purpose of volutary admiistratio is busiess rehabilitatio, i practice it is frequetly used as the first step i the liquidatio of a compay. Iitiatig a volutary admiistratio A volutary admiistratio may be iitiated at short otice by: the directors (by resolutio of the board); a liquidator (or provisioal liquidator) of the compay; or a secured creditor who is etitled to eforce a security iterest over the whole, or substatially the whole, of the compay s property. Effect of volutary admiistratio The iitiatio of a volutary admiistratio automatically creates a moratorium durig which o civil proceedigs (icludig isolvecy proceedigs), may be take without the coset of the admiistrator or the permissio of the court. The moratorium also prevets the commecemet or implemetatio of ay eforcemet process i relatio to the property of the compay without the permissio of the court. The moratorium is iteded to provide the admiistrator sufficiet time to formulate a rescue proposal for the busiess, or i the evet that this does ot prove possible, a orderly realisatio of the compay s assets. There are a umber of exceptios to the moratorium. The mai exceptios relate to secured creditors, as oted below: (a) where a secured creditor with a perfected security iterest over the whole, or substatially the whole, of the compay s property eforces its security iterest withi 13 busiess days from the date o which otice is give to the secured creditor of the appoitmet of the admiistrator (if the security iterest is ot eforced durig this period, the the secured creditor will be subject to the geeral moratorium). I practice, it is commo for secured creditors to eter ito a deed of forbearace with the admiistrator, where the secured creditor agrees ot to exercise their rights to eforce immediately i exchage for the admiistrator agreeig to provide their coset to eforcemet by the secured creditor at some later stage; (b) where a secured creditor takes certai actios to eforce its security iterest before the commecemet of the admiistratio or where a ower or lessor of property takes certai actios to recover its property before the commecemet of the admiistratio; (c) where a secured creditor has a security iterest i perishable property or where a ower or lessor of perishable property seeks to recover its perishable property from the compay; ad (d) where a bak has a baker s lie (possessory security iterest) over certai property of the compay (icludig cash (i the form of otes or cois), egotiable istrumets, securities or derivatives). I additio to the moratorium, o trasfer of shares or alteratio i the status of members of the compay may take place without the coset of the admiistrator or with the permissio of the court. The admiistrator may oly give coset to the trasfer if he or she is satisfied that the trasfer is i the best iterests of the compay s creditors as a whole. 14 A guide to Asia Pacific restructurig ad isolvecy procedures

15 Importatly, the moratorium does ot exted to the exercise of ipso facto clauses (clauses i cotracts that eable a couterparty to termiate the cotract o the isolvecy of the other party) although providers of certai essetial services, such as electricity, gas, water ad telecommuicatios services, are uable to termiate supply. Powers of the admiistrator The powers vested i the admiistrator are extesive. He or she has the same powers that the compay or ay of its officers would have if the compay were ot uder admiistratio, ad may do all such thigs as may be ecessary for the maagemet of the compay. Whe performig his or her fuctio as a admiistrator, the admiistrator is actig as a aget of the compay. Upo the appoitmet of a admiistrator, the directors powers to maage the compay are automatically suspeded. However, the directors remai uder a obligatio to cotiue to assist the admiistrator, icludig by providig iformatio to the admiistrator about the compay s affairs. The admiistrator may dismiss ay or all of the directors ad may also appoit ew directors. The admiistrator has the power to dispose of property of the compay (icludig property subject to a perfected security iterest) i the ordiary course of the compay s busiess, or with the coset of the secured creditor or permissio from the court. This icludes the ability to deal with ay secured property that was: a circulatig asset (as defied i the Persoal Property Securities Act 2009) whe the security iterest arose; or subject to a floatig charge, i the maer the compay could deal with the secured property immediately before it stopped beig a circulatig asset or the floatig charge became a fixed charge. A secured creditor or ower/lessor may apply to the court for a order restraiig the admiistrator from disposig of the secured property. However, the court may oly make the order if it is ot satisfied that arragemets have bee made to adequately protect the iterests of the secured creditor or ower/lessor, as the case may be. Role of creditors i a volutary admiistratio Creditors retai a role i volutary admiistratio: at the meetig of creditors which must be held withi eight busiess days of the commecemet of the admiistratio, the creditors have the power to: (a) resolve to appoit a committee of creditors (which will have a cosultative role with the admiistrator); ad (b) replace the admiistrator. A secod creditors meetig is held withi 20 to 25 busiess days of the commecemet of the admiistratio, at which time the creditors will cosider the compay s future. This time period is ofte exteded by applicatio to the court (i extreme cases, extesios ca be for a year or more) for large or complex admiistratios. Prior to the meetig, the admiistrator must provide the creditors with a report about the compay s busiess, property affairs ad fiacial circumstaces as well as the admiistrator s views o a umber of prescribed questios, icludig whether it would be i the creditors iterests for the compay to execute a deed of A guide to Asia Pacific restructurig ad isolvecy procedures 15

16 compay arragemet, ed the admiistratio or wid up the compay. At this meetig, the creditors have the power to resolve that the compay will execute a deed of compay arragemet, ed the admiistratio or be woud up. A resolutio will carry if approved by a majority i umber of the creditors votig ad by a group of creditors owed more tha 50% of the votig creditors total debts. Ulike i a scheme of arragemet, all creditors vote i the same pool ad there are o creditor classes. If o result is reached, the admiistrator the has the optio to make a castig vote for or agaist the proposed resolutio ad will covetioally vote cosistetly with the decisio of the majority i value. Coclusio of volutary admiistratio A volutary admiistratio may be eded i a umber of ways, icludig where: (a) the compay eters ito a deed of compay arragemet; (b) the compay s creditors resolve that the admiistratio should ed; (c) the compay s creditors resolve that the compay be woud up; (d) the court orders that the admiistratio is to ed; or (e) the court appoits a provisioal liquidator or orders that the compay be woud up. Deed of compay arragemet A deed of compay arragemet is essetially a compromise betwee a compay i volutary admiistratio ad its creditors. A compay ca oly eter ito a deed of compay arragemet whe it is i volutary admiistratio ad whe the compay s creditors have resolved that it be etered ito. The admiistrator will prepare the deed of arragemet which eeds to specify a umber of prescribed matters, icludig the property available to pay creditors claims, the ature ad duratio of ay moratorium period, to what extet the compay is to be released from its debts, that the etitlemets of eligible employee creditors will have the same priority that they would have o widig-up (uless explicitly agreed to by a meetig of those eligible employee creditors), ad the circumstaces i which the deed termiates. A deed of arragemet ca provide for differet returs to differet types of creditors, provided the deed is ot ufairly prejudicial or discrimiatory to oe or more creditors ad maximises the chaces of the compay cotiuig, or where this is ot possible, results i a better retur for the compay s creditors ad members tha would result from a immediate widig up of the compay. Oce the relevat majority of creditors have resolved for the compay to eter ito the deed of compay arragemet, the compay ad the admiistrator must execute it. Followig executio, the deed is bidig o all the creditors. There is o requiremet to have the deed approved or sactioed by a court. Receivership Receivership is a self help remedy available to creditors who hold a security iterest i property of the compay. The right to appoit a receiver is govered by the terms of the security as a matter of cotract betwee the secured creditor ad the compay. If the appoitmet is ot effected i accordace with the terms of the security, the receiver will be a trespasser ad will 16 A guide to Asia Pacific restructurig ad isolvecy procedures

17 be exposed to liability. Typically, the right of a secured creditor to appoit a receive arises immediately upo a specified default by the compay or upo demad. I additio, to a private appoitmet, a receiver ca be appoited i special circumstaces by a court, o the applicatio of a creditor (such as where its security is ueforceable) or the Australia Securities ad Ivestmets Commissio (ASIC) (such as where the compay is uder ivestigatio ad ASIC seeks to freeze the activities of the compay). The receiver must be a registered liquidator. The appoitmet of a receiver by a secured creditor does ot prevet usecured creditors from pursuig their outstadig claims agaist the compay. Accordigly, appoitmet of a receiver is ofte cocurret with the board s appoitmet of a volutary admiistrator. As oted above, a secured creditor with a security iterest over the whole, or substatially the whole, of the property of the compay has 13 busiess days from the date o which otice is give to the secured creditor of the appoitmet of the admiistrator to eforce its security before it becomes subject to the moratorium that arises o the commecemet of volutary admiistratio. Such eforcemet actio may iclude the appoitmet of a receiver by the secured creditor. I these circumstaces, the receiver s powers will take precedece over those of the admiistrator i respect of the secured property. Powers of the receiver A receiver of a compay geerally has broad powers to do all thigs ecessary, or as icidetal to, the attaimet of the objectives for which the receiver was appoited. A umber of additioal powers are also set out i the Corporatios Act, icludig the power to: (a) eter ito possessio ad take cotrol of the compay s property i accordace with the terms of the court order or istrumet appoitig the receiver; (b) covert property of the compay ito moey: (c) borrow moey o the security of the property of the compay; (d) carry o ay busiess of the compay; ad (e) execute ay documet, brig or defed ay proceedigs or do ay other act or thig i the ame of ad o behalf of the compay. The effect of receivership o the compay will deped o the terms of the receiver s appoitmet. If the receivership is oly with respect to a sigle asset, it may be that the directors ca cotiue to carry o the busiess of the compay substatially uhidered. However, as is more usually the case, where a receiver is appoited over the whole, or substatially the whole, of the property of the compay, the directors will effectively reliquish their powers to the receiver. The receiver s primary duty is to the secured creditor who appoited the receiver, although the receiver will usually be appoited as aget of the compay. The receiver also has certai statutory duties to report to ASIC. I exercisig its power of sale, the receiver must take all reasoable care to sell the property for ot less tha its market value (if it has a market value) or otherwise the best price that is reasoably obtaiable, havig regard to the circumstaces at the time the property is sold. Coclusio of receivership A receivership will ordiarily come to a ed whe the receiver has fulfilled the terms of his or her appoitmet. I the case of a privately appoited receiver, this is whe the receiver has realised A guide to Asia Pacific restructurig ad isolvecy procedures 17

18 to the extet possible the secured assets for the beefit of the secured creditor appoitig the receiver. Liquidatio The liquidatio of a isolvet compay is iteded to provide for the widig-up of the compay ad the equitable distributio of the compay s assets. There are two forms of liquidatio, amely: (a) widig-up ordered by the court (sometimes called compulsory widig-up); ad (b) volutary widig-up. Widig-up ordered by the court A court may order the widig-up of a compay i a umber of circumstaces. The two most commo are: (a) the compay is isolvet, ofte established where the compay has failed to comply with a statutory demad served o it by a creditor with respect to a debt of at least A$2000 withi 21 days; or (b) the court is of the opiio that it is just ad equitable that the compay be woud up. A applicatio for widig-up may be made by the compay itself, a creditor (icludig secured creditors ad cotiget creditors), a member, a director (oly i respect of a isolvet widig-up), a liquidator or provisioal liquidator, or certai regulatory bodies. Upo the court makig a order to wid up a compay, the court will appoit a liquidator. The liquidator must be a official liquidator. 18 A guide to Asia Pacific restructurig ad isolvecy procedures Volutary widig-up A compay may be woud up volutarily by its members through the passig of a special resolutio. A special resolutio of members requires 21 days writte otice ad at least 75% of the votes that may be cast at the relevat meetig, although a shorter otice period is permitted if members comprisig at least 95% of the votes that may be cast at the relevat meetig agree beforehad. A members volutary widig-up oly relates to the widig-up of solvet compaies (which is a coditio of a members volutary widig-up), so is ot dealt with i ay detail i this ote. Creditors volutary widig-up If the compay is isolvet ad the compay s directors are uable to provide a declaratio of solvecy, the widig-up must proceed as a creditors volutary widig-up. I these circumstaces, after the members have appoited a liquidator by ordiary resolutio, the liquidator has 11 days from the meetig date to covee a meetig of the compay s creditors. The liquidator must give the creditors at least seve days otice of the meetig ad with that otice provide a summary of the affairs of the compay i the prescribed form. It must also provide iformatio about the kow creditors, icludig the estimated amouts of their claims. Withi seve days of the resolutio for volutary widig-up, the directors of the compay must give the liquidator a statemet, i the prescribed form, about the compay s busiess, property, affairs ad fiacial circumstaces. At the meetig of the compay s creditors, the creditors have the power to replace the liquidator. I practice, it is commo for directors of a isolvet compay to iitiate a volutary admiistratio istead of a creditors

19 volutary widig-up, give the relative efficiecies ad protectios available uder a volutary admiistratio. Provisioal liquidatio The court may provisioally appoit a official liquidator at ay time after the filig of a widig-up applicatio. Whilst the circumstaces i which the appoitmet of a provisioal liquidator may be made have bee described as ifiite i case law, a provisioal liquidator have commoly bee appoited where the compay s property is i jeopardy or because of disputes betwee directors. A provisioal liquidator derives his powers from the order appoitig him although it is commo practice for a provisio liquidator s powers to be substatially the same powers as a liquidator. Effect of liquidatio Upo widig-up (whether ordered by the court or iitiated volutarily) or the commecemet of a provisioal liquidatio of a compay: (a) the compay must (except o a provisioal liquidatio) cease to carry o its busiess except so far as is i the opiio of the liquidator required for the beeficial disposal or widig-up of that busiess; (b) the liquidator becomes aget of the compay ad takes custody (but ot owership) of all of the property of the compay; (c) the directors powers to maage the compay are suspeded but the directors must cotiue to help the liquidator, icludig by providig iformatio to the liquidator about the compay s affairs; (d) o shares i the compay may be trasferred (except with leave of the liquidator or leave of the court); ad (e) a automatic moratorium is created durig which o proceedig agaist the compay or i relatio to property of the compay or ay eforcemet process i relatio to such property may be brought or progressed except with leave of the court. The moratorium does ot affect the rights of a secured creditor to realise or otherwise deal with property subject to a perfected security iterest. Similar to volutary admiistratio, the moratorium created o commecemet of liquidatio does ot exted to the exercise of ipso facto clauses. Realisig the compay s assets A liquidator s primary role is to collect i, realise ad the distribute the assets of the compay to the creditors. I recoverig the assets of the compay, a liquidator has broad powers to sell or otherwise dispose of the compay s property. Ay amouts upaid o the shares of the compay have to be paid up by the members. The Corporatios Act cotais a umber of clawback provisios, which eable the liquidator to recover further assets i certai circumstaces. These provisios are summarised i the sectio Voidable Trasactios below. Distributig the compay s assets Oce the liquidator has received, evaluated ad determied the proofs of debt submitted by the creditors ad realised the assets of the compay, it must distribute those assets to the creditors. Geerally, the secured assets of the compay are first distributed to the secured creditors. The remaiig assets, if ay, are the distributed to the usecured creditors i a prescribed order of A guide to Asia Pacific restructurig ad isolvecy procedures 19

20 priority. The claims of each relevat class are paid out equally, or pari passu, amogst the creditors i that class. There are umerous categories of claim, each of which carry a differet priority. For the purposes of illustratio, these broadly comprise three groups: (a) the costs of the liquidatio (such as the liquidator s remueratio ad/or the costs of the court applicatio for widig-up the compay); (b) certai employee etitlemets to wages, superauatio cotributios/guaratees ad various other paymets; ad (c) all other usecured creditors. If there are ay surplus assets after the usecured creditors have bee paid out, these are retured to the members. Coclusio of liquidatio Oce the liquidator has realised all of the property of the compay (or so much of that property that ca, i his or her opiio, be realised without eedlessly protractig the widigup), ad has distributed those assets to the creditors ad made a fial retur (if ay) to the members, the liquidatio ca draw to a close ad the compay ca be deregistered. Schemes of Arragemet A scheme of arragemet is ot a isolvecy procedure, but rather a compromise or agreemet betwee a compay ad a class or classes of creditors or members. While schemes of arragemet ivolvig the members of a compay may be used i the cotext of a corporate reorgaisatio ad are ofte used i coectio with takeovers i Australia, schemes of arragemet ivolvig the creditors of the 20 A guide to Asia Pacific restructurig ad isolvecy procedures compay are geerally used i the cotext of isolvecy. I that form they are similar to deeds of compay arragemet. However, whilst deeds of compay arragemet may be etered ito without court approval but oly whe a compay is i volutary admiistratio, schemes of arragemet require approval by the court but may be etered ito at ay time ad are ofte used outside of a formal isolvecy procedure i the Australia cotext. A scheme of arragemet bids members or creditors withi a class, icludig ukow creditors who fall withi that class. The power of the majority to bid the miority i the class operates regardless of ay cotractual restrictios (e.g. requiremets for amedmets ad variatios set out i the loa documetatio goverig the debt beig compromised). Classes are determied by groupig together persos who have similar legal rights agaist the compay. For a scheme of arragemet to be approved, a meetig of the relevat class or classes of creditors or members is coveed by the court. This applicatio to covee a meetig may be made by the compay, a creditor, a member or, where the compay is beig woud up, the liquidator. The applicat is required to deliver prescribed iformatio to the votig class or classes prior to the meetig. The relevat class or classes will vote o the proposal, ad a proposal is passed where there is a vote i favour by a majority i umber, represetig debts or claims agaist the compay i a aggregate amout of at least three quarters of the total amout of debt ad claims of each class votig at the meetig. The court is the required to sactio the scheme, at which poit the scheme becomes bidig o the compay ad the relevat class or classes of creditors or members.

21 Util a scheme of arragemet has bee approved by the court, it does ot beefit from a moratorium ad creditors remai free to pursue their claims agaist the compay. Due to the relatively complicated ad rigid procedure ivolved i a scheme of arragemet (icludig the eed for at least two court hearigs), the requiremet to split creditors ito classes ad the associated costs, volutary admiistratio ad deeds of compay arragemets ted to be preferred i the cotext of isolvecy, particularly with respect to small to medium sized compaies. I more recet times, schemes of arragemet have bee used i Australia as a restructurig tool i cases where for istace: (a) a formal isolvecy would result i sigificat value destructio for all stakeholders: for example, as a result of ipso facto clauses becomig operative; or (b) where secured debt is widely held (such as i the case of large secured ledig sydicates), ad it is ot possible to cram dow secured creditors ito a compromise uder the volutary admiistratio process as a result of the typical restrictios foud i fiace documets requirig a uaimous vote by the secured creditors for the amedmet to key commercial terms (such as amortisatio schedules ad margi) or the release of security. Voidable Trasactios Uder the clawback provisios cotaied i the Corporatios Act, a liquidator is able to recover property or compesatio from third parties for the beefit of creditors ad to avoid certai debts owig to third parties, where they relate to certai voidable trasactios etered ito by the compay i the relevat period prior to its widig-up. These powers are oly available to a liquidator, ad ot to a receiver or admiistrator. The time periods withi which such trasactios are vulerable depeds o the type of trasactio i questio, ragig from six moths i the case of a isolvet trasactio to te years for a isolvet trasactio which has the purpose of defeatig creditors. Ufair loas are ot subject to ay time limit. The court has wide powers to make orders for the recovery of property or the provisio of compesatio from third parties where they are foud to be party to a voidable trasactio. The legth of the claw-back period is measured backwards i time from the relatio-back day. Geerally speakig this is the date a admiistrator was appoited or the date the applicatio to wid up the compay was filed with the Court. Isolvet trasactios A trasactio is a isolvet trasactio where a ufair preferece is give by the compay or a ucommercial trasactio is etered ito by the compay, at a time whe the compay is isolvet or where that ufair preferece or ucommercial trasactio cotributes to the isolvecy of the compay. Ufair preferece: I short, a trasactio is a ufair preferece give by the compay to a creditor if the trasactio results i the creditor receivig from the compay, i respect of a usecured debt, more tha the creditor would receive from the compay i respect of the debt if the trasactio were set aside ad the creditor were to prove for the debt i the widig-up of the compay. A isolvet trasactio that is a ufair preferece is voidable if the trasactio occurred withi the six-moth period edig o the relatio-back day or, for trasactios A guide to Asia Pacific restructurig ad isolvecy procedures 21

22 with related etities, the four-year period edig o the relatio-back day, or, for trasactios etered ito for the purpose of defeatig or iterferig with the rights of ay or all creditors, the te-year period edig o the relatio-back day. Ucommercial trasactio: I short, a trasactio is a ucommercial trasactio if a reasoable perso would ot have etered ito it, havig regard particularly to the beefits ad detrimet arisig from the trasactio for the compay. A isolvet trasactio that is a ucommercial trasactio is voidable if the trasactio occurred withi the two year period edig o the relatio-back day or, for trasactios with related etities, the four-year period edig o the relatio-back day, or, for trasactios etered ito for the purpose of defeatig or iterferig with the rights of ay or all creditors, the te-year period edig o the relatio-back day. Recoveries from isolvet trasactios resultig from a ufair preferece are more commo i Australia tha i most other jurisdictios i the Asia-Pacific regio because there is o requiremet for the liquidator to show that the creditor that has had the beefit of the relevat trasactio had ay itetio to be preferred. Ufair loas to a compay A loa is ufair if the iterest or other charges payable by the compay are, or were at ay time, extortioate. I determiig what is extortioate, the court will give regard to certai matters, icludig (a) the risk to the leder, (b) the value of ay security, ad (c) the amout of the loa. A ufair loa is voidable if it was made at ay time before the date o which the widig-up of the compay commeced. Ureasoable director-related trasactios A trasactio is a ureasoable director-related trasactio where the compay gives some beefit to a director of the compay or to a associate of a director (icludig a paymet, a trasfer of property or a issue of securities) that a reasoable perso would ot have give, havig regard particularly to the beefits ad detrimet arisig from the trasactio for the compay. Persoal Liability of Directors A director s primary duty is to act i the best iterests of the compay. Where the compay is i fiacial distress, directors are also required to cosider the iterests of the creditors of the compay ad it is particularly i that cotext ad i ay evetual liquidatio where a director may be pursued for a breach of his or her duties. There are umerous specific duties which flow from this uder the geeral law ad as set out i the Corporatios Act. The most relevat is the duty to prevet isolvet tradig. Australia s isolvet tradig regime is oe of the most oerous i the world. As a result, may directors ofte fid it difficult to coduct iformal restructurig whe the compay s day-to-day solvecy may be i costat questio, give the persoal risk they are takig o, eve though that may be i the best iterests of the compay. Istead, the Corporatios Act provides directors with the safe have of volutary admiistratio as a meas of rescuig the compay. Ufortuately, give the lack of restrictio o ipso facto clauses, volutary admiistratio ca ofte be a value-destroyig process for stakeholders. Where a director breaches oe of his or her duties to the compay, the director ca be liable: 22 A guide to Asia Pacific restructurig ad isolvecy procedures

23 (a) where the compay has suffered a loss or damage, to compesate the compay by way of equitable damages or compesatio payable uder the Corporatios Act; (b) where the compay has icurred a debt whe it is isolvet or where the compay becomes isolvet by icurrig that debt ad at that time there were reasoable grouds for suspectig that the compay was isolvet, or would become isolvet, to compesate the compay or a creditor; (c) where the director has gaied some beefit, to accout to the compay for that beefit; (d) where the director has improperly acquired some property, to retur that property to the compay; (e) to pay a pecuiary pealty uder the Corporatios Act of up to AUD200,000; (f) to disqualificatio from maagig a compay; or (g) to crimial prosecutio, where: (i) the director, i a reckless or itetioally dishoest maer, fails to exercise its powers ad discharge its duties; (ii) the director uses its positio, dishoestly ad either recklessly to or with the itetio of directly or idirectly gaiig a advatage for themselves, or someoe else, or causig detrimet to the compay; (iii) the director uses iformatio obtaied as a director, dishoestly ad either recklessly to or with the itetio of directly or idirectly gaiig a advatage for themselves, or someoe else, or causig detrimet to the compay; or (iv) the director, i a dishoest maer, breaches its duty to prevet isolvet tradig. Leder Liability I Australia, geerally the risk of a leder beig held liable to pay its customer s debts is small. The pricipal risk arises where the leder is foud to be actig as a shadow director of a compay that becomes isolvet ad therefore becomes subject to the same duties as a director. The cocept of shadow director ca be foud i the defiitio of director i the Corporatios Act. A perso will be a shadow director if the directors of the compay or body are accustomed to act i accordace with [that] perso s istructios or wishes. Guaratees A guaratee is a secodary obligatio by a third party relatig to a primary obligatio by a cotractig party (i.e. a borrower uder a loa agreemet). If the primary obligatio is altered, discharged or fails, the guaratee may ot be eforceable. Usually the documet cotaiig a guaratee will also cotai a direct idemity as a idepedet primary obligatio. This should survive eve if the guaratee is ot eforceable. I the majority of Australia states, a guaratee must be i writig to be eforceable. Guaratees are available i most circumstaces, for example dowstream (paret to subsidiary), upstream (subsidiary to paret) ad cross-stream (betwee sister compaies withi a group). Corporate beefit issues eed to be addressed especially i the cotext of upstream ad cross-stream guaratees. Priority The Persoal Property Securities Act (2009) (PPSA), which came ito effect i Jauary 2012, has substatially reformed how security A guide to Asia Pacific restructurig ad isolvecy procedures 23

24 is take over persoal property i Australia. The PPSA removes the distictio betwee fixed ad floatig security iterests, ad establishes a commo registry kow as the Persoal Property Securities Register. I short, the PPSA provides for security iterests to be raked by method ad order of perfectio. Security iterests i property ot govered by the PPSA (for example, lad) usually rak by order of creatio ad, where appropriate, the date of registratio o ay relevat register. Broadly speakig, i the cotext of receivership of assets subject to a PPSA security iterest, claims rak as follows: Recogitio of Foreig Isolvecy Proceedigs The Model Law o Cross Border Isolvecy promoted by UNCITRAL was adopted i Australia i 2008 i the form of the Cross-Border Isolvecy Act 2008 (Cth). This exteds the Australia court s ability to recogise foreig isolvecy proceedigs ad to provide assistace to foreig represetatives i coectio with foreig isolvecy proceedigs. The Cross Border Isolvecy Act provides that, where the Model Law applies, the court ad the liquidator are obliged to cooperate to the maximum extet possible with foreig courts ad foreig represetatives. holders of security which rak ahead of the security uder which the receiver is appoited; holders of security (from the proceeds of which the receiver will recover costs, remueratio ad expeses); certai employee etitlemets to wages, superauatio cotributios/guaratees ad various other paymets (raks ahead of security over circulatig assets); usecured creditors; ad shareholders. I additio to the Model Law, the court ca also recogise foreig isolvecy proceedig or provide assistace i corporate isolvecies pursuat to the Corporatios Act, to the extet that the relevat proceedigs fall outside the scope of the Model Law. The Corporatios Act provides that the courts must recogise isolvecy procedures iitiated i certai coutries (icludig, the Uited States, the Uited Kigdom, Malaysia, Sigapore ad New Zealad) whilst recogitio of isolvecy proceedigs iitiated outside of these coutries remai at the discretio of the court. The priority of paymets for a liquidatio are summarised i the sectio Liquidatio distributig the compay s assets above. New Moey Ledig Normally leders will isist o additioal security or priority (ahead of debts icurred prior to the proceedigs) before ay ew moies are advaced to compaies after the commecemet of ay isolvecy proceedigs. 24 A guide to Asia Pacific restructurig ad isolvecy procedures

25 A guide to Asia Pacific restructurig ad isolvecy procedures 25

26 Chia 26 A guide to Asia Pacific restructurig ad isolvecy procedures

27 Chia Cotributed by Clifford Chace (Beijig ad Shaghai offices) Key Elemets: Isolvecy procedures are court-drive Maaged by court-appoited admiistrator Automatic moratorium for secured creditors with limited exceptios Upstream guaratees limited to a domestic basis Itroductio This sectio is desiged to provide a geeral outlie of the mai corporate isolvecy procedures available i the Peoples Republic of Chia, excludig Taiwa ad the Special Admiistrative Regios of Hog Kog ad Macau ( Chia ). Corporate isolvecy i Chia is pricipally govered by the Eterprise Bakruptcy Law of the People s Republic of Chia which came ito force o 1 Jue 2007 (the Bakruptcy Law ), ad is supplemeted by various judicial iterpretatios issued by the People s Supreme Court. The Bakruptcy Law applies to both state-owed ad privately held compaies, icludig joit vetures ad wholly foreig-owed etities, as well as, to the extet permitted by applicable law, other o-corporate etities such as parterships. Fiacial istitutios such as baks, securities compaies ad isurace compaies may be subject to differet rules to be promulgated by the State Coucil. The mai isolvecy procedures available uder Chiese law are bakruptcy (pocha), rectificatio (chogzheg), ad compromise (hejie). Bakruptcy of state-owed eterprises previously could also be admiistered by admiistrative fiat i accordace with policies issued by the State Coucil; however it has sice issued a guidelie cofirmig that this procedure is o loger permitted. Bakruptcy will lead to the ultimate widig up of a busiess, whereas rectificatio ad compromise both aim to rehabilitate the debtor. The solvet widig up of Chiese etities, kow as liquidatio (qigsua), is ot withi the remit of the Bakruptcy Law. A widig up is presumed to be solvet uless a declaratio of bakruptcy is obtaied from the court. The procedure to be implemeted will deped o the ature of the etity. Geerally speakig, the solvet liquidatio of a compay is govered by the Compay Law of the People s Republic of Chia. The ambit of this ote will ot exted to this topic. Commecemet of Isolvecy Proceedigs Either the debtor or its creditors may apply to a court to commece bakruptcy or rectificatio. Oly the debtor, o the other had, may apply to istitute compromise proceedigs. Geerally speakig, these three proceedigs will be available provided that the test for isolvecy as discussed below is met. However, except for the test for isolvecy, the Bakruptcy Law does ot set out ay detailed test as to whether the rectificatio or compromise should be available, leavig the court with broad discretio. Each isolvecy procedure commeces whe the court accepts the applicatio, rather tha the date of filig. For bakruptcy, the court must decide whether to accept the applicatio withi 15 days of filig; however, a superior court may exted this time period to 30 days. If a creditor files a applicatio, the court is obliged to otify the debtor withi five days, after which the debtor is give seve days to object to the applicatio. If the debtor does object, the court has 10 days to accept or reject the applicatio. A guide to Asia Pacific restructurig ad isolvecy procedures 27

28 A applicat may challege the court s refusal of a applicatio by appeal. Alteratively, if the court fails to provide a respose withi 15 days, the applicat is etitled to re-file its applicatio directly with the superior court. Test for Isolvecy A debtor may apply to commece bakruptcy or compromise proceedigs if it is uable to pay its debts whe due, ad (1) its liabilities exceed the value of its assets; or (2) it clearly lacks the ability to discharge its liabilities. To istitute rectificatio proceedigs, the debtor must establish that, o the balace of probabilities, it will lose capacity to repay its debts. This less oerous requiremet is attributed to a desire to preserve viable busiesses. For a creditor to petitio for ivolutary liquidatio or rectificatio proceedigs, however, it eed oly establish that the debtor is uable to pay its debts as they fall due. Protectio from Creditors The court s acceptace of a isolvecy applicatio gives rise to a moratorium o eforcemet proceedigs. The debtor is prohibited from disposig of its assets, ad creditors are required to file their claims with the court-appoited admiistrator. A secured creditor geerally remais etitled to eforce its security iterest after the acceptace of a isolvecy applicatio. I a rectificatio, however, the secured creditor is prohibited from eforcig its security iterest durig the etire rectificatio period. The court may, evertheless, allow a creditor to eforce its security iterest where the asset is otherwise likely to suffer damage or dimiish i value. Admiistratio The court will appoit a admiistrator oce it accepts the isolvecy applicatio. The role may be filled by a liquidatio pael, a professioal firm or a idividual, although the court will usually oly appoit a idividual for simple bakruptcy matters. I order to be chose, the admiistrator will be required to meet certai professioal expertise ad practice qualificatios. Role of admiistrator The admiistrator s role will vary depedig upo the isolvecy procedure. I bakruptcy, it will replace the maagemet i operatig the debtor compay, ad realise the debtor s assets for the beefit of its stakeholders. I rectificatio, o the other had, the admiistrator will either maage the debtor or supervise its operatios. The admiistrator should report o its activities to the court, ad its performace is also supervised by the creditors through the creditors meetig ad/or creditors committee. It must also determie, prior to the first creditors meetig, whether the debtor s busiess should cotiue its operatios. Appoitmet of admiistrator To esure impartiality, the Bakruptcy Law provides that the court has the sole power to appoit a admiistrator ad determie its remueratio, although creditors are able to apply for the removal of a admiistrator should it fail i performig its duties. The admiistrator may oly resig with leave of the court, ad ot without good reaso. Bakruptcy Oce the court has accepted the applicatio to commece bakruptcy proceedigs, the admiistrator will take o maagemet of the busiess ad prepare for the compay s liquidatio. 28 A guide to Asia Pacific restructurig ad isolvecy procedures

29 Disposal of Assets The admiistrator is to draft plas for the disposal of the debtor s assets ad its distributio of the proceeds, ad submit both for approval at the creditors meetig. These plas must also receive the acceptace of the court. Assets are priced ad disposed of through a auctio process, except where the creditors meetig resolves otherwise or if the assets are subject to trasfer restrictios as a matter of law or regulatio. Ay creditor who submits a claim to the admiistrator i a bakruptcy proceedig is etitled to atted ad vote at the creditors meetigs. A secured creditor s right to vote is limited; for example, it caot vote o whether to adopt a compromise or scheme of distributio of the debtor s assets. As a geeral rule, a resolutio of a creditors meetig is passed by referece to a majority of the debtor s usecured debt. Performace of cotracts The admiistrator may elect to either perform or rescid a cotract subject to partial performace. If the cotract is cotiued, the couterparty is etitled to ask for security, ad a failure by the admiistrator to do so is deemed to be a rescissio of the cotract. If the admiistrator fails to respod to the couterparty withi two moths of the court s acceptace of the bakruptcy applicatio, the cotract is also deemed as rescided. Where a ivestor has failed to make full paymet of capital, the admiistrator is etitled to call him/her to do so. Priority of claims Secured creditors are paid i priority from the proceeds of their collateral, ad sit outside the geeral hierarchy for distributio of assets. A amout exceedig the value of the collateral, however, will rak as a usecured claim. Assets are distributed i accordace with the rakig below: 1. Debts for commo beefit ; i.e. expeses icurred i bakruptcy for the good of the estate, such as cotracts due to be performed, ad salaries paid to cotiue the debtor s operatios. 2. Employmet-related claims, such as upaid employees wages, pesio paymets ad medical beefits. 3. Social isurace cotributios ad taxes. 4. Usecured claims. Where the proceeds are isufficiet to pay out a class i full, distributio is made to the members of that class o a pro rata basis. Ay remaiig assets will be used to repay the capital cotributios of the shareholders. Rectificatio Corporate rectificatio is a procedure iteded to rehabilitate viable busiesses that require temporary protectio from creditors. It is a three-stage process. Stage 1: Applicatio The debtor or a creditor applies to the court to brig proceedigs for rectificatio. Ay shareholder holdig a equity share i the debtor equal to or greater tha 10% is also etitled to file a applicatio. Stage 2: Rectificatio The admiistrator geerally assumes maagemet of the compay, although the debtor may apply to the court for the right to cotiue to maage its busiess uder the admiistrator s supervisio. There is o clear guidelie as to whe such a A guide to Asia Pacific restructurig ad isolvecy procedures 29

30 applicatio will be accepted, but it is usually the exceptio rather tha the rule. Withi six moths of commecig the rectificatio period, the admiistrator (or debtor) must prepare a pla aimed at improvig the debtor s fiacial situatio ad busiess performace. For example, the admiistrator must draft a scheme for the repaymet of creditors ad restructurig of debt. Oce this has bee submitted, the court will covee a creditors meetig to vote o the pla. Stage 3: Implemetatio Similar to the votig procedure used i other jurisdictios, creditors will be divided ito differet classes; e.g. secured creditors, usecured creditors, ad employmet-related creditors. The approval of each class must be obtaied, which is determied by the affirmative vote of a majority of creditors i the class that are preset ad votig, ad who must comprise at least two-thirds of the value of the debt held i that class. majority, which equates to o less tha two-thirds of the value of the usecured debt. It must also receive the approval of the court. If the creditors meetig fails to accept the agreemet, the court will declare the debtor bakrupt. There is o time limit withi which a creditors meetig must be held for compromise proceedigs. Debtors sometimes will attempt to stall proceedigs by makig tactical applicatios for rectificatio or compromise. The moratorium for secured creditors is lifted oce a order permittig a compromise is issued. It thus appears that a compromise is a viable optio for small to medium-sized debtors who have maily usecured debt. Set-off If a creditor icurs a debt to the debtor prior to the court s acceptace of the bakruptcy, the creditor may propose a set-off to the admiistrator, except i the followig circumstaces: If the rectificatio pla is approved by the creditors, a further applicatio must be made to the court to obtai its sactio before the pla ca be implemeted. If the creditors reject the pla, the debtor ad/or admiistrator may evertheless apply to the court for approval provided certai coditios are met. Compromise A debtor may apply for a court order to iitiate a compromise procedure, whereby the debtor is give the opportuity to propose a settlemet of debts with its creditors. The debtor will draft a settlemet agreemet that is later submitted to the creditors meetig. The creditors may accept the agreemet by a simple the creditor s right was acquired from a third-party creditor of the debtor after the court accepted the bakruptcy applicatio; the creditor was aware of the debtor s actual or potetial isolvecy, uless the liabilities were icurred by operatio of law or for reasos that occurred oe year or more before the bakruptcy applicatio was made; or a debtor of the debtor acquired creditor rights whe aware of the debtor s actual or potetial isolvecy, save where the creditor rights were obtaied by operatio of law or for reasos that occurred oe year or more before the bakruptcy applicatio was made. 30 A guide to Asia Pacific restructurig ad isolvecy procedures

31 Challeges to Atecedet Trasactios The Bakruptcy Law sets out certai circumstaces that reder a trasactio etered ito by the compay before bakruptcy as either voidable, at the applicatio of the admiistrator to the court, or void. This aims to prevet the bakrupt compay from actig beyod its ordiary course of busiess to dimiish the value of its assets available to usecured creditors. It also esures that o ujustified preferece is give to certai usecured creditors at the expese of others. Voidable Trasactios The followig acts are voidable, provided they take place withi the year prior to the date the court accepts the bakruptcy applicatio: the sale or trasfer of assets at o value or at a ureasoable value; the provisio of security for a usecured debt; the early paymet of debts which are ot due; ad a waiver of a creditor s rights. Where, i the six moths prior to the date the court accepts the bakruptcy applicatio, a debtor has made preferetial paymet to creditors whilst isolvet, the admiistrator may also apply to the court to declare such paymets ivalid. Void Trasactios The followig acts are deemed to be void: cocealmet or diversio of the bakrupt compay s assets to avoid liabilities; ad ackowledgmet of utrue debts or the fabricatio of liabilities. A admiistrator is etitled to recover these lost assets. Furthermore, if such acts harm the iterests of creditors, the legal represetative of the debtor ad other resposible persoel may be called upo to idemify the resultig losses. Director Liability Civil liability may be icurred by a director, a member of the supervisory board, or a seior maager for the debts of a bakrupt compay i a limited umber of circumstaces. For this purpose, the supervisory board refers to the compoet of Chia s two-tier corporate goverace structure resposible for supervisig decisios of the board of directors. Uder Chiese law, directors are obliged to act i good faith ad diligece. If either of these duties are breached, ad as a result the compay is placed ito bakruptcy, the director may icur civil liability. The director may also be prohibited from assumig the positio of director or seior maagemet i ay compay for a period of three years from the date of the coclusio of the bakruptcy. Ay admiistrator that acts to harm the iterests of a creditor may also be liable for compesatio. Please see Challeges to Atecedet Trasactios for further iformatio. The legal represetative ad, if required by the court, the fiacial maagemet persoel ad other operatioal maagemet persoel of the debtor must reder their cooperatio to the court ad the creditors meetig durig isolvecy. For the duratio of the bakruptcy proceedigs, the court may detai or fie the debtor s staff ad maagemet if they leave their place of domicile. A guide to Asia Pacific restructurig ad isolvecy procedures 31

32 Leder Liability The risk i Chia of leders beig held liable to pay their customers debts is rather remote. Whilst the pricipal risk for a leder uder certai commo law jurisdictios (such as Eglad ad Wales) arises where the leder is foud to be actig as a shadow director of a compay that becomes isolvet, the terms shadow director or shadow maager are ot legal cocepts uder Chiese law. Geerally speakig, Chiese law does ot impute liability to a leder, as a shadow director or otherwise, where the leder takes actios to protect its iterests i a compay that is i fiacial difficulty. Guaratees Guaratees are available for dowstream (i.e. paret to subsidiary) ad cross-stream (i.e. betwee sister compaies withi a group) trasactios, both o a domestic ad cross-border basis. If the guaratee is grated (i) i favour of a overseas leder; or (ii) i favour of a domestic leder but the borrower (debtor) is a overseas istitutio, it will geerally require the approval of the State Admiistratio of Foreig Exchage ( SAFE ). Upstream guaratees (i.e. subsidiary to paret) are limited to domestic purposes. Where the guaratee is give i favour of a overseas leder, the borrower must: (a) be directly or idirectly held by the Chiese guarator (beig a o-fiacial istitutio); (b) have a positive et asset value; ad (c) have geerated a profit for the past three years (for log-term projects, e.g. resource developmet compaies, this time period is five years). I additio, SAFE requires that (a) the ratio of et assets to total assets of the guarator (beig a o-fiacial istitutio) shall, i priciple, ot be less tha 15% ad (b) the amout of the debt guarateed by the guarator shall ot be more tha 50% of its et assets. There are o express requiremets for corporate beefit uder Chiese law. The compay must comply, however, with the provisios set out i its articles of associatio. These ca iclude: guaratee limits, ad requiremets to obtai board or shareholder approval. If a compay provides a guaratee for the debts of a shareholder or the actual cotrollig party of the compay, that guaratee must be approved by a shareholders resolutio. This vote shall ot iclude the guarateed shareholder or the shareholder cotrolled by the guarateed actual cotrollig party. To be effective uder Chiese law, a guaratee must be made i writig. The agreemet should also specify whether it is a geeral guaratee, i which the guarator oly assumes liability after distributio of the bakrupt etity s assets, or a guaratee with joit ad several liability, where the creditor ca seek direct redress agaist the guarator. If this is ot clearly specified, the court will costrue the guaratee as joit ad several. For a obligatio secured by both a guaratee ad other forms of security, the guarator is oly liable for the usecured portio. Govermet authorities ad istitutios set up for public welfare, such as schools ad hospitals, are legally icapable of gratig a guaratee. 32 A guide to Asia Pacific restructurig ad isolvecy procedures

33 New Moey Ledig Normally leders may oly advace ew moies to debtors subject to bakruptcy proceedigs after the court has approved the rectificatio petitio or a settlemet betwee the debtor ad its creditors. I the cotext of restructurig, a admiistrator or debtor may eter ito a secured loa for the purpose of cotiuig busiess operatios. I the cotext of settlemet, leders eed to carefully assess the compay s ability to perform the settlemet agreemet (so that the bakruptcy proceedigs would ot be resumed due to its default) ad the impact of the settlemet o the compay s ability to repay ay ew loa (e.g. whether ay substatial amout of debt has bee exempted or exteded, ad if so, o what coditios). Cross-border Isolvecy The Bakruptcy Law exteds the effect of Chiese bakruptcy procedures to debtor s assets located overseas, although this relies o the cooperatio of foreig courts. Foreig bakruptcy proceedigs may also be bidig i Chia with respect to the Chia-based assets of a debtor. Foreig proceedigs are bidig where: (a) there is a treaty for reciprocity, or reciprocity i practice, i the recogitio of isolvecy proceedigs; (b) the foreig isolvecy proceedigs do ot cotravee the basic priciples of Chiese law ad Chiese sovereigty, security ad public iterest; ad (c) the foreig bakruptcy proceedigs do ot impair the legal iterests of a Chiese creditor. There are presetly aroud 40 treaties for reciprocal eforcemet of judgmets betwee Chia ad other jurisdictios, oe of which specifically refer to bakruptcy proceedigs ad few, if ay, ivolve Chia s major tradig parters. Similar requiremets apply to the eforcemet of foreig judgmets i Chia. Cocepts such as public iterest ad impair have bee used to refuse recogitio of otherwise meritorious cases. A guide to Asia Pacific restructurig ad isolvecy procedures 33

34 Hog Kog SAR 34 A guide to Asia Pacific restructurig ad isolvecy procedures

35 Hog Kog SAR Cotributed by Clifford Chace (Hog Kog office) Key Elemets: No statutory procedure for the rehabilitatio of compaies No statutory moratorium prevetig the eforcemet of security Receivership available as a self help remedy for secured creditors Ati-avoidace mechaisms available to liquidators i order to maximize recoveries for creditors Scheme of arragemet available to compromise claims of creditors ad cotributories Itroductio This sectio provides a geeral outlie of the mai corporate isolvecy procedures i Hog Kog. Hog Kog isolvecy law is govered primarily by the Compaies Ordiace, the Bakruptcy Ordiace ad the Compaies (Widig-up) Rules. It is based o the laws of Eglad ad Wales ad teds to be creditor-friedly. There is o statutory procedure i Hog Kog for the rehabilitatio of compaies comparable to admiistratio i Eglad or Chapter 11 i the US. Therefore the majority of compaies i fiacial difficulties will either eter a iformal restructurig process (with the aim of restructurig the compay s debts i order to cotiue operatig) or go ito liquidatio. The primary purpose of liquidatio is to realise the assets of the compay ad distribute the proceeds to the compay s creditors ad, i the evet that there is a surplus, to the compay s shareholders. Liquidatio is discussed further below. We also briefly cosider receivership, schemes of arragemet, challeges to atecedet trasactios, the persoal liability of directors, leder liability, guaratees, priority of security ad claims, ew moey ledig ad the recogitio of foreig isolvecy proceedigs. The isolvecy of authorised istitutios, which icludes Hog Kog baks, is addressed by the Bakig Ordiace. I summary, the Bakig Ordiace provides that the provisios of the Compaies Ordiace relatig to a creditor s volutary widig up do ot apply to authorised istitutios ad provides a special process for the presetatio of a petitio for the widig up of a authorised istitutio. There are also bespoke isolvecy regimes for certai other types of compaies, such as isurace compaies. These special regimes are beyod the scope of this ote. Liquidatio There are two types of liquidatio: (1) widig up by the court (also called compulsory widig up ); ad (2) volutary widig up. There are two types of volutary widig up, both of which do ot ivolve the court: (a) members volutary widig up this is ot a isolvecy process, as i order for the compay to qualify for a members volutary widig up its directors must file a declaratio of solvecy with the Compaies Registry certifyig that the compay will be able to pay its debts i full; ad A guide to Asia Pacific restructurig ad isolvecy procedures 35

36 (b) creditors volutary widig up this is ormally iitiated by the shareholders or directors of a isolvet compay. Typically, oce the directors have cocluded that the compay is isolvet ad there is o real prospect of a restructurig, the directors will covee a meetig of members to pass a special resolutio to wid up the compay ad choose the liquidator. Sectio 228A of the Compaies Ordiace allows the directors, without first cosultig the shareholders, to commece a volutary widig up of the compay ad appoit a provisioal liquidator. This procedure is rarely used because it is oly available where widig up uder aother route is ot reasoably practical, ad the directors are required to give detailed reasos as to why this is the case. Widig up by the court is ormally iitiated by a creditor (secured or usecured) but is also available to the compay itself where the shareholders of the compay have passed a resolutio for widig up. The liquidator is typically a accoutacy professioal, ad the liquidatio process takes place uder the supervisio of both the court ad (to a much lesser extet) the Govermet (through the Official Receiver). Compulsory Widig Up Grouds for a widig up order Most applicatios for a compay to be woud up by the court are made by usecured creditors ad usually o the grouds that the compay is uable to pay its debts. A compay is deemed uable to pay its debts where: (a) the compay fails to satisfy withi three weeks of the service of otice a debt exceedig HKD10,000; or (b) the eforcemet of a judgmet of the court agaist the compay has ot bee satisfied i full; or (c) it appears to the court that the compay is uable to pay its debts, takig ito accout the cotiget ad prospective liabilities of the compay. The usual test relied upo is the cash flow test but the balace sheet test ca also be relied o. Other grouds for compulsory widig up are available, the most commo of which is that the court is of the opiio that it is just ad equitable that the compay should be woud up. This just ad equitable groud has bee held to iclude that the compay was formed to carry o a illegal or fraudulet purpose or that the mai purpose of the compay has goe. Impact of presetatio of widig up petitio At ay time after the makig of the widig up applicatio ad before the makig of a widig up order, the court may (if requested by the compay or ay creditor) stay ay legal proceedigs agaist the compay o such terms as it thiks fit. Where a widig up order has bee made, or a provisioal liquidator has bee appoited, there is a automatic stay of legal proceedigs ad o legal proceedig ca be proceeded with or commeced agaist a compay except with the leave of the court, ad subject to such terms as the court may impose. Court-based eforcemet proceedigs agaist a compay or its assets, such as attachmet ad executio, become void o the commecemet of a widig up. The commecemet date is (retrospectively) the date o which the widig up petitio is preseted (i a widig up by the court) or the date o which the resolutio is passed (i a volutary widig up). 36 A guide to Asia Pacific restructurig ad isolvecy procedures

37 A widig up (whether compulsory or volutary) has o formal effect o the process of security eforcemet (subject to the possibility of a atecedet challege, as summarised below). I respect of cotracts to which the compay is a party, it is geerally the case for both compulsory ad volutary widig up that the cotracts will cotiue, subject to the liquidator s powers to disclaim oerous cotracts (discussed below). Employmet cotracts are a exceptio to the rule: employees egaged uder service cotracts are automatically dismissed from the date of publicatio of the widig up order, although the liquidator may permit the employmet of some or all of the compay s employees to cotiue, usually o a short-term basis, if the liquidator iteds to carry o the busiess of the compay. The widig up order also has the effect of termiatig the directors powers of maagemet ad cotrol over the compay. Provisioal liquidatio (before the widig up order) Followig the presetatio of a petitio for widig up, the court may make a order for the appoitmet of a provisioal liquidator (or, usually, for two provisioal liquidators who act joitly ad severally). The usual reaso for the appoitmet of a provisioal liquidator is to preserve the assets ad records of a compay for the beefit of the creditors durig the period followig the presetatio of the widig up petitio ad before the gratig of the widig up order (usually this is a period of about two moths). The most commo groud for seekig the appoitmet of a provisioal liquidator is that there is a perceptio that the assets ad affairs of the compay are i jeopardy, primarily because the directors ad/or shareholders may dissipate the assets while the petitio for widig up is pedig. A provisioal liquidator has o statutory or implied powers, ad therefore his powers eed to be set out i full i the court order appoitig him. The court may vest a rage of powers i the provisioal liquidator for maagig the affairs of the compay ad cotiuig the busiess i the ordiary course. O occasios, the provisioal liquidator is give all the powers of a liquidator. O ad followig the appoitmet of a provisioal liquidator the compay cotiues to exist ad the idetity ad character of the compay is ot altered but the appoitmet has the effect of displacig the directors powers of maagemet. The provisioal liquidator assumes cotrol of the compay ad takes ito his custody or cotrol all the property ad thigs i actio to which the compay is or appears to be etitled. The appoitmet of a provisioal liquidator has the effect of automatically revokig the authority of ay aget of the compay who was appoited by or o behalf of the compay. The etry ito provisioal liquidatio does ot of itself lead to the termiatio of the cotracts of the compay. The provisioal liquidator is a officer of the court ad so does ot represet ay creditor or class of creditors. O the appoitmet of a provisioal liquidator, all legal proceedigs agaist the compay are stayed. Choice of liquidator The Official Receiver becomes the provisioal liquidator whe a widig up order is made, uless a provisioal liquidator has already bee appoited i which case the provisioal liquidator will cotiue to act as such util aother perso becomes the liquidator. With the exceptio of cases which qualify for the summary liquidatio procedure (discussed briefly below), the provisioal liquidator is required to call separate meetigs of the creditors ad cotributories to decide upo a applicatio to be made to the court for the appoitmet of a liquidator. Creditors have the A guide to Asia Pacific restructurig ad isolvecy procedures 37

38 opportuity durig these meetigs to put forward the ame of their preferred cadidate to be appoited as liquidator. If o omiatio has bee received by the Official Receiver for the appoitmet of a liquidator, the, by the operatio of the roster system of the Admiistrative Pael of Isolvecy Practitioers for Court Widigs Up (a cab-rak system), the ame of the ext perso o the roster will be put to creditors at the meetig. If the creditors ad cotributories do ot agree o the choice of the liquidator, the the court may make such order as it thiks fit. The court will act i the iterests of all the parties ad is ot i ay way boud by the recommedatios of the creditors or cotributories. As is the case for provisioal liquidators, the usual practice is to appoit two liquidators who act joitly ad severally. Where the court is satisfied that the assets of the compay are ulikely to exceed HKD200,000, the court may order that the compay is to be woud up i a summary maer. Oe of the mai effects of such a order is that the Official Receiver or the provisioal liquidator shall be the liquidator, without there beig ay meetigs of creditors or cotributories. Liquidator s ability to disclaim cotracts The liquidator of a compay may, with the leave of the court, disclaim oerous property (icludig shares or stock i compaies ad uprofitable cotracts) of the compay beig woud up, at ay time withi 12 moths after the commecemet of widig up (or such loger period as may be allowed by the court), though the court i Hog Kog has displayed a reluctace to sactio a disclaimer of property i cases where the rights of third parties may be adversely affected. Accrued rights ad obligatios will ot be affected by ay such disclaimer. 38 A guide to Asia Pacific restructurig ad isolvecy procedures Distributig the compay s assets As a geeral priciple, creditors claims i a widig up will rak i the followig order: (a) particular expeses (receivers or liquidators expeses ad other expeses i relatio to the isolvecy); (b) creditors preferred by statute (e.g. tax ad remueratio of employees); (c) usecured creditors; ad (d) shareholders, accordig to their rights ad iterests i the compay. Distributio amog each class is pari passu by referece to the value of claims as accepted by the liquidator. Pari passu distributio is madatory ad is oe of the fudametal priciples of Hog Kog corporate isolvecy law. The distributio of the proceeds of the eforcemet of security geerally falls outside the widig up: these proceeds are used to satisfy the debts of the creditors who had the beefit of the relevat security iterest, with ay excess proceeds the distributed i accordace with the order set out above. The exceptio to this is i relatio to security created by way of a floatig charge, where preferetial debts must be paid before the charge holder is paid. Secured creditors may eforce rights I the ordiary course of evets, a secured creditor is etitled to rely o the terms of a properly drafted security documet to eforce its security. I a compulsory or volutary liquidatio of the compay, the secured creditor remais etitled to eforce its security rights, either by itself, or through the appoitmet of a receiver.

39 Ay creditor (secured or usecured) may apply to the court to put a compay ito compulsory widig up, although usecured creditors ormally iitiate this process. Creditors caot iitiate a volutary widig up. I practice, a secured creditor will ormally recover its debt by eforcig its security ad will claim i the liquidatio oly i relatio to the usecured balace of the debt (if ay). Admissibility of debts I a widig up, debts of all descriptios are properly provable by a creditor, which iclude liquidated ad uliquidated claims, certai ad cotiget debts, existig ad future debts ascertaied, ay obligatio to pay damages, periodic paymets ad claims for iterest. Iterest o a debt is provable as part of the debt, except i so far as it is payable i respect of ay period after the commecemet of the widig up. The amout of ay admissible debt (ad iterest) is calculated as at the date of the commecemet of the widig up, i.e. the date of the filig of the petitio i a compulsory widig up ad the date of the passig of the resolutio i a creditors volutary widig up. Madatory set-off also applies. Oly mutual credits, mutual debts or other mutual dealigs betwee the compay ad the creditor, determied as at the date of the commecemet of the widig up (for this purpose, i a compulsory widig up the commecemet of the widig up is take as the date of the widig up order), ca be set-off agaist each other. Creditors of a compay may cotractually agree (for example by a itercreditor agreemet) how their claims should be raked prior to ad o the widig up of the compay. Itercreditor agreemets are ot uusual. The extet to which a itercreditor agreemet will be eforceable i isolvecy is uclear. Receivership A secured creditor ca exercise its rights uder a security documet to appoit a receiver over the assets of the compay covered by the security. A security documet usually provides that a secured creditor may appoit a receiver upo the occurrece of oe or more specified evets of default. I additio, a receiver ca be appoited by the court (although this is rare i practice). The receiver s primary duty is to maage ad realise assets, i order to remit the proceeds to the secured creditor which appoited him. The scope of the receiver s powers will be set out i the security documet ad the documet appoitig him, or i the court order. A receiver also has commo law duties ad specific duties set out i the Compaies Ordiace. There is o legal reaso why the compay should be woud up after the secured creditor has bee paid, but i practice very ofte a compay is woud up after the appoitmet of a receiver. Schemes of Arragemet This is ot a isolvecy procedure, but a mechaism cotaied i sectio 166 of the Compaies Ordiace which allows the court to sactio a compromise or arragemet that has bee agreed betwee a prescribed majority of the relevat class or classes of creditors or members ad the compay. A scheme of arragemet bids all creditors or members withi a class, icludig ukow creditors who fall withi that class. The A guide to Asia Pacific restructurig ad isolvecy procedures 39

40 power of the majority to bid a miority i the class operates regardless of ay cotractual restrictios (e.g. requiremets for amedmets ad variatios set out i the loa documet which govered the debt beig compromised). A scheme of arragemet is typically proposed by the compay as a meas of avoidig liquidatio. There is o process uder Hog Kog law to put i place a moratorium to prevet secured creditors from realisig their security or usecured creditors from brigig or cotiuig legal proceedigs agaist the compay whilst a scheme of arragemet (or a iformal restructurig) is attempted. However, uder Hog Kog law the appoitmet to a compay of provisioal liquidators (pursuat to the presetatio of a petitio to wid up the compay, ad pedig the makig of the widig up order) has the effect of stayig all legal proceedigs (icludig attachmet proceedigs) agaist the compay (but does ot prevet secured creditors from realisig their security). The High Court i Hog Kog has i recet years grated provisioal liquidators powers to formulate restructurig plas, thereby providig a moratorium o legal proceedigs durig which a scheme of arragemet ca be developed. I order to iitiate a scheme of arragemet effectig a compromise of creditors claims, a applicatio is filed with the court. Oce the court s agreemet to the coveig of meetigs of creditors (or classes of creditors) has bee obtaied, a explaatory statemet ad otices coveig such meetig(s) are the set to all kow creditors. At the meetig of creditors (or of a class of creditors), a majority i umber ad three-quarters i value of the creditors (or the classes of creditors) who are preset ad votig either i perso or by 40 A guide to Asia Pacific restructurig ad isolvecy procedures proxy must accept the proposal i order for it to be bidig o all the creditors (or all the creditors of the class, as the case may be). Followig the creditors meetig(s), the scheme must be sactioed by the High Court: this requires a formal hearig i full court. The scheme takes effect upo filig with the registrar of compaies the court order sactioig the scheme. If creditors claims have bee addressed i a scheme of arragemet, ad if the scheme of arragemet is approved, there is a effective cram-dow of creditors claims (eve if a relevat creditor voted agaist the scheme). Ay creditors whose claims have ot bee addressed i the scheme retai their full origial rights agaist the compay after the scheme has bee put i place. Puttig i place a straightforward scheme of arragemet is likely to take four moths, with more complex schemes takig more tha six moths to put i place. If a scheme of arragemet is proposed ad is ot approved, or is approved ad put i place but ot successfully implemeted, the widig up of the compay is very likely to follow. Iformal Workout Fiacial istitutios are ofte at the forefrot of restructurig proposals, ad baks ted to adhere to a set of iformal guidelies joitly issued by the Hog Kog Associatio of Baks ad the Hog Kog Moetary Authority. As the guidelies apply oly to baks, difficulties ca arise whe a iformal workout ivolves other types of creditors. This iformal corporate rescue process is effected by cotract betwee the compay ad (usually) its leder creditors, leavig other creditors (usually trade creditors) free to pursue other remedies as they see fit.

41 Challeges to Atecedet Trasactios Security grated by a compay, ad trasactios etered ito by a compay, are subject to the risk of the security beig ivalid, or the trasactio beig voided, if it is grated, or etered ito, durig the applicable risk period (kow as the hardeig period ) before the makig of a applicatio for that compay s widig up. The legth of the risk period varies, depedig o the type of challege ad the circumstaces i existece at the time the security was created. Prefereces: sectio 50 Bakruptcy Ordiace, as applied by 266 ad 266B Compaies Ordiace, to compaies beig woud up A ufair preferece is a act (e.g. gratig of security or guaratee) which has the effect of puttig a creditor, a surety or a guarator i a better positio tha it would otherwise have bee i upo a widig up of the compay. The geeral risk period is six moths, but is icreased to two years if the ufair preferece is grated to a associate, for example, a compay i which the compay i widig up holds oe-third or more of the votes capable of beig cast at a geeral meetig. The legislatio is ot etirely clear, but the geeral view is that, i order for the relevat trasactio to be ivalidated as a ufair preferece, the compay must have bee isolvet at the relevat time ad must have bee iflueced i decidig to give the preferece by a desire to produce the effect of puttig the relevat creditor, surety or guarator i a better positio. Extortioate credit trasactios: sectio 264B Compaies Ordiace A credit trasactio is extortioate if (takig ito cosideratio the credit risks) credit is provided for grossly exorbitat paymets (either actual or cotiget e.g. o default) or the trasactio grossly cotravees priciples of fair dealig. The risk period is three years. Avoidace of floatig charges: sectio 267 Compaies Ordiace A floatig charge grated i the 12 moths prior to the widig up will be ivalid except (i) where it ca be proved that the compay was solvet immediately after creatio of the floatig charge or (ii) to the extet of cash received by the compay for gratig the floatig charge ad iterest o it. Fraudulet coveyaces: sectio 60 Coveyacig ad Property Ordiace Although rarely ivoked, this sectio provides for the voidability of dispositios made with the itet to defraud creditors. There is o time limit, ad the sectio applies whether or ot the compay makig the dispositio is beig woud up or isolvet. Trasactios at a udervalue Hog Kog does ot have this cocept i the cotext of corporate isolvecy. Trasactios havig this effect are likely to fall withi the misfeasace provisios i the Compaies Ordiace, which eable recovery to be sought from the director or officer of the compay, but do ot eable the trasactio to be avoided. Persoal Liability of Directors Directors ca icur civil ad crimial liability for the debts of a isolvet compay i a umber of ways. Persos liable uder these provisios ofte iclude ot oly existig ad past directors, but also existig ad past officers (which icludes maagers ad compay secretaries), promoters of the compay A guide to Asia Pacific restructurig ad isolvecy procedures 41

42 ad ay liquidator or receiver of the compay, as well as persos occupyig the positio of director by whatever ame called. The scope of persos potetially subject to liability therefore eeds to be looked at carefully o a case by case basis. The pricipal areas of risk for directors are breach of duty ad fraudulet tradig. Hog Kog does ot curretly have a statutory isolvet tradig regime (for example, similar to that i Eglad or Australia). Breach of duty Civil law actios ca be take by the compay agaist a director o the basis of a breach of directors duties to the compay. I particular where a compay is isolvet or ear isolvecy, directors have a duty to the compay to take ito accout the iterests of the geeral body of creditors. There is ofte a overlap betwee breach of directors duties ad statutory provisios: a breach of duty to creditors might also amout to fraudulet tradig (discussed below). Equitable remedies are available, ad a liquidator ca also take actio uder the statutory provisio for misfeasace, which provides for a summary procedure for the eforcemet of existig rights that the compay has agaist directors. Uder the misfeasace provisios, the court ca order directors to compesate the compay for its losses. Other directors duties which might be relevat o a widig up iclude exercisig powers for improper purposes, misapplicatio of corporate property, breach of restrictios o maiteace of capital ad breach of the duty to act with care, skill ad diligece. Fraudulet tradig: sectio 275 Compaies Ordiace This sectio eables the liquidator, the Official Receiver ad ay creditor or cotributory of a compay to apply for cotributios 42 A guide to Asia Pacific restructurig ad isolvecy procedures from ay persos (i.e. ot oly directors ad shadow directors) who were kowigly parties to the carryig o of busiess with itet to defraud creditors. The sectio requires a fidig of dishoesty, ad applies whether or ot the compay is woud up. The court may declare that ay such persos are persoally liable for all or ay of the debts or other liabilities of the compay. I additio, where the compay is woud up, such persos are guilty of a offece ad are liable to imprisomet ad a fie. Crimial liability I additio to fraudulet tradig, the breach of certai other provisios of the Compaies Ordiace may also result i crimial liability. These iclude defraudig creditors (which overlaps to a certai extet with the provisios o fraudulet tradig), failure to keep proper accouts, falsificatio of books, ad failure to assist with the liquidatio. Disqualificatio of directors Hog Kog also has provisios for the disqualificatio of directors, similar to those i Eglad ad Wales. Grouds for disqualificatio iclude covictio for certai idictable offeces, breaches of certai provisios of the Compaies Ordiace, fraudulet tradig or other fraudulet coduct i widig up, ad coduct rederig such perso ufit to be a director of a compay. Leder Liability Geerally speakig, the risk i Hog Kog of leders beig held liable to pay their customers debts is small. I theory, the pricipal risk for a leder arises where it is foud to be actig as a shadow director of a compay that is woud up. The expressio Shadow Director is defied i sectio 168C of the Compaies Ordiace as...a perso i accordace with

43 whose directios or istructios the directors or a majority of the directors of the compay are accustomed to act. I other commo law jurisdictios, geerally the greatest risk to leders who are foud to be shadow directors comes from the applicatio of a isolvet tradig regime, which Hog Kog does ot have. It is coceivable that a leder which was foud to be a shadow director might be liable uder the fraudulet tradig regime or for aother of the offeces referred to above, but we have ot see this i practice. Guaratees Guaratees are available i most circumstaces, for example dowstream (paret i respect of the obligatios of its subsidiary), upstream (subsidiary i respect of the obligatios of its paret) ad cross-stream (a compay i respect of the obligatios of its sister compay). However, the rules o fiacial assistace provide that where a perso has acquired, is acquirig or is proposig to acquire shares i a compay, it is ot lawful for the compay or ay of its subsidiaries to give fiacial assistace (which icludes the gratig of a guaratee) directly or idirectly for the purpose of that acquisitio. Exceptios to this prohibitio apply where the compay acquired is ot listed ad certai coditios (icludig as to the fiacial coditio of the compay givig the fiacial assistace) are satisfied. Corporate beefit issues will also eed to be addressed especially i the cotext of upstream ad cross-stream guaratees. A guaratee is a secodary obligatio by a third party relatig to a primary obligatio by a cotractig party (i.e. a borrower uder a loa agreemet). If the primary obligatio is altered, discharged or fails, the guaratee may ot be eforceable. Usually the documet cotaiig a guaratee will also cotai a direct idemity as a idepedet primary obligatio. This should survive eve if the guaratee is ot eforceable. Strictly, a guaratee eed ot be i writig to be eforceable, but i practice gauratees i busiess trasactios are always i writig. Priority of Security Iterests Security is geerally available over all types of assets i Hog Kog. If a compay is givig security over as may of its assets as possible, there will usually be oe security documet called a debeture which will iclude a umber of fixed charges ad a floatig charge (a charge over a chagig pool of assets). It is possible for the court to re-classify a fixed charge as a floatig charge if there are, for example, iadequate restrictios o what the compay ca do with the asset or the proceeds of the asset subject to the charge. This may affect the priority of the security, as a floatig charge will ormally rak behid all fixed security. Security usually raks by chroological order of creatio, but to preserve the priority positio, otice may eed to be give. For some assets, registratio is required i a asset or documet register (e.g. lad ad buildigs) ad security will rak by the date of registratio. Legal security will usually have priority over equitable security provided that it is properly created, eve though it may be created after equitable security is created. Most types of security give by a compay must be registered with the Compaies Registry i Hog Kog withi five weeks of the date of creatio of the security: if they are ot so registered, they will be void agaist ay liquidator of the compay. Registratio is required where security is grated by a compay icorporated i Hog Kog A guide to Asia Pacific restructurig ad isolvecy procedures 43

44 or by a compay icorporated outside Hog Kog (ad registered as a o-hog Kog compay uder Part XI of the Compaies Ordiace) ad creatig security over assets i Hog Kog. Third parties who could reasoably be expected to make a search with the Compaies Registry may be treated as havig otice of security registered at the Compaies Registry. Particular rules apply to security take by mortgage ad rakig of further advaces secured by a mortgage agaist subsequet mortgages. New Moey Ledig Where leders have agreed to advace ew moies to a compay which has etered ito widig up proceedigs, they will usually isist o beig provided with additioal security or priority (ahead of debts icurred prior to the proceedigs), thereby givig the ew moies a super priority should the compay go o to be woud up. Recogitio of Foreig Isolvecy Proceedigs The Compaies Ordiace cofers jurisdictio o the Hog Kog courts to wid-up compaies icorporated outside Hog Kog. However, the court will exercise the power to wid up a foreig compay oly where it ca be demostrated that: (a) the foreig compay has a sufficiet coectio, or exus, with Hog Kog to support the court exercisig its discretio to make a widig up order; (b) there is a reasoable possibility, if a widig up order is made, of beefit to those applyig for the widig up order; ad (c) oe or more persos iterested i the distributio of assets of the compay are persos over whom the court ca exercise jurisdictio. There is o statutory basis for recogitio or assistace with foreig isolvecy proceedigs. However, the courts i Hog Kog have show a willigess to cooperate with the courts of foreig jurisdictios. As a practical matter, the courts i Hog Kog will recogise foreig isolvecy proceedigs ad represetatives appoited i such proceedigs, ad will recogise the foreig represetatives powers to collect assets (although the Hog Kog courts will require proceeds of assets to be applied i accordace with the order of distributios prescribed by Hog Kog law). It is recommeded that separate widig up proceedigs be iitiated i Hog Kog where a foreig represetative seeks to protect the collective ature of the foreig proceedigs (e.g. by restraiig creditors from attachig assets). 44 A guide to Asia Pacific restructurig ad isolvecy procedures

45 A guide to Asia Pacific restructurig ad isolvecy procedures 45

46 Idia 46 A guide to Asia Pacific restructurig ad isolvecy procedures

47 Idia Cotributed by AZB & Parters, Mumbai, Idia Ashwi Ramaatha, Parter 23rd Floor, Express Tower, Narima Poit Mumbai Idia T: F: Key Elemets: Special isolvecy-related procedures for idustrial compaies are available. Employees are coferred high priority o distributio of liquidated assets. Idia isolvecy laws do ot have ay extra-territorial jurisdictio, or do they provide for the recogitio of foreig isolvecy proceedigs. Amedmets have bee recetly proposed to the isolvecy laws i Idia. Itroductio This sectio provides a geeral outlie of the mai corporate isolvecy procedures i Idia. The primary legislatio goverig corporate isolvecy i Idia is the Compaies Act, 1956 (the Compaies Act ). Amedmets have bee proposed to the widig up provisios i the Compaies Act pursuat to the Compaies (Amedmet) Act, 2002 (the Amedmet Act ) ad the Compaies Bill, 2011 (the Compaies Bill ), but to date these amedmets are ot i force. The Compaies Act is supplemeted by the Sick Idustrial Compaies (Special Provisios) Act, 1985 ( SICA ), which deals with the rescue ad rehabilitatio of sick idustrial uits (as discussed below i the sectio etitled Sick Idustrial Compaies). I additio, the Securitisatio ad Recostructio of Fiacial Assets ad Eforcemet of Security Iterest Act, 2002 ( SARFAESI ) deals with the eforcemet of security by creditors, icludig i the case of the widig up of a compay. Methods of widig up I Idia, the widig up of a corporate etity may take place by: widig up ordered by the Court (sometimes called compulsory widig up ); volutary widig up iitiated either by: (1) members; or (2) creditors; or widig up uder the supervisio of the Court. Uder proposed amedmets, the powers of the Court i widig up proceedigs will be delegated to the Natioal Compay Law Tribual (the Tribual ). Compulsory widig up A compay may be woud up by the Court followig the presetatio of a petitio for widig up i certai circumstaces. The most commo grouds are: (1) where the compay is uable to pay its debts; ad (2) where the Court is of the opiio that it is just ad equitable for the compay to be woud up. A compay is deemed uable to pay its debts i the followig circumstaces: (a) it fails to pay a debt of INR500 or more (we ote that the Amedmet Act proposes to icrease this threshold to INR100,000) withi three weeks of demad by a creditor; (b) it fails to pay i full a debt issued uder a judgmet, decree or order of a Court; or A guide to Asia Pacific restructurig ad isolvecy procedures 47

48 (c) it is proved to the satisfactio of the Court that the compay is uable to pay its debts ad is commercially isolvet. The Amedmet Act proposes a umber of additioal grouds to iitiate the widig up of a compay, icludig where the compay has acted agaist the iterests of the sovereigty, itegrity ad security of Idia, its public order or dececy ad morality. Procedure Widig up commeces o the date of presetatio of the widig up petitio, provided the documet is admitted by the Court. The Court, at its discretio, may appoit a official liquidator (as a provisioal liquidator) prior to makig a widig up order. O the makig of a widig up order, the provisioal liquidator will become the official liquidator. Compay persoel must verify ad submit a compay statemet of affairs to the official liquidator withi 21 days of either the appoitmet of the official liquidator or the issue of the widig up order. The official liquidator will the take ito its custody all the property, effects ad actioable claims of the compay, from the date of the widig up order by the Court or whe the official liquidator is appoited. The official liquidator, by way of advertisemet, will also fix a date for all creditors of the compay to prove their debts. After coductig a ivestigatio, the official liquidator will commuicate the acceptace or rejectio of each debt to the respective creditors. Withi three moths of the date of the creditors meetig, the official liquidator will file a certificate with the Court with respect to the debts claimed by creditors, icludig whether they were accepted or rejected. 48 A guide to Asia Pacific restructurig ad isolvecy procedures O the appoitmet of a liquidator, all the powers of the board of directors (icludig the maagig director) ad the maager, if ay, cease. As soo as the affairs of the compay are fully woud up, the liquidator is required to: (a) draw up a accout of the widig up, showig how the widig up has bee coducted ad the property of the compay disposed of; ad (b) call a geeral meetig of the creditors for the purpose of layig the accout before them, ad givig ay explaatio thereof. The appoitmet of the liquidator does ot, however, completely preclude the ivolvemet of the Court ad the official liquidator. Withi oe week after the meetig, the liquidator is required to sed to the Registrar of Compaies ad the official liquidator, a copy of the accouts, ad cofirmatio of the meetig. O scrutiy of the books ad accouts of the compay, the official liquidator must report ay prejudicial matters to the Court (i this regard, see the sectio o Leder Liability below). The Court may direct the official liquidator to further ivestigate the affairs of the compay, ad for that purpose the Court shall ivest the official liquidator with all such powers it deems fit. O receipt of the official liquidator s report, the Court may make a order to dissolve the compay, or make ay other order that the circumstaces of the case permit. I such circumstaces, the widig up will therefore commece as a volutary widig up util the Court passes a order subjectig the procedure to the supervisio of the Court. The compay s assets will be distributed accordig to the order of priority specified i the Compaies Act.

49 Maagemet As metioed above, if a compay is beig woud up by the Court, the widig up order ad appoitmet of the official liquidator has the effect of dischargig all officers ad employees of the compay ad causig the directors power to cease. Shareholder Liability The Court is empowered to make calls o all or ay of the cotributories, to the extet of their liability, for: (i) the paymet of moey to satisfy the debts ad liabilities of the compay; (ii) meetig the expeses of the widig up; ad (iii) the adjustmet of the rights of the cotributories amogst themselves. Proof of debts I ay form of widig up of a isolvet compay, the applicable rules with regards to proof of debts, the valuatio of auities ad future ad cotiget liabilities, ad the respective rights of secured ad usecured creditors are cotaied i the Compaies Act together with Sectios 46 to 50 of the Presidecy Tows Isolvecy Act, 1909 ad Sectios 45 to 50 of the Provicial Isolvecy Act, These rules set out that all usecured creditors have to adduce proof of their debts i the prescribed maer ad all such debts are to be paid pari passu. The rules provide for all debts ad liabilities, whether usecured, preset or future, certai or cotiget, to which the debtor is subject whe it is adjudged isolvet, or which the debtor may icur before the date of such adjudicatio, are deemed to be debts provable i isolvecy with the exceptio of: (a) uliquidated damages arisig otherwise tha by cotract or breach of trust; ad (b) debts cotracted from a perso who had otice of the presetatio of a isolvecy petitio agaist the debtor. The rules also cotai the priciple of set-off, whereby the sum due from oe party shall be set-off agaist ay sum due from the other ad oly the balace shall remai payable. Sick Idustrial Compaies Ay compay registered for five years or more which has, at the ed of ay fiacial year, accumulated losses equal to or exceedig a amout equal to its etire paid up capital ad free reserves is cosidered to be a sick idustrial compay uder SICA. Such a compay may be referred by its board of directors, the cetral or state govermet, the Reserve Bak of Idia or its creditors to the Board of Idustrial ad Fiacial Recostructio ( BIFR ) who may the coduct a equiry ito whether the compay is sick or ot. Where the compay is foud to be sick, the BIFR may either give the compay a reasoable period of time to raise its et worth above its accumulated losses or costruct a scheme for the compay s fiacial recostructio. If the BIFR is of the opiio that the sick idustrial compay caot be rescued eve by way of a scheme, it may order the sick idustrial compay be woud up. The proposed Amedmet Act, if implemeted, would repeal SICA ad the provisios relatig to sick idustries would be icorporated i the Compaies Act. Furthermore, the powers of the BIFR would be vested i a Tribual, which could wid up a compay deemed uable to be rescued. Volutary widig up A compay may volutarily wid up its affairs if it is uable to carry o its busiess, it was formed for a limited purpose, or it is A guide to Asia Pacific restructurig ad isolvecy procedures 49

50 uable to meet its fiacial obligatios. The object of volutary widig up is to realise the assets, pay off the liabilities ad distribute the surplus as expeditiously as possible. Uder the Compaies Act, there are two methods of volutarily widig up a compay: (a) a creditors volutary widig up; ad (b) a members volutary widig up. A members volutary widig up oly relates to the widig up of a solvet compay, so it is ot dealt with i ay detail i this ote. Creditors volutary widig up I the case of a volutary widig up by the creditors, where the directors are uable to guaratee the compay s solvecy, the creditors are etitled to secure cotrol of the widig up to safeguard their iterests. Whe a geeral meetig of the compay s shareholders is held for the purpose of widig up the compay o a isolvet basis, the compay must also call a meetig of the creditors to be held o the same day or the ext day after such shareholders meetig. The creditors meetig shall be presided over by a director of the compay, at which he or she shall preset to the creditors a full statemet of the affairs of the compay, ad a list of creditors ad their estimated claims. The creditors ad the members of the compay, at their respective meetigs, may omiate a liquidator of the compay. If the creditors ad the compay omiate differet persos as liquidator, however, the choice of the creditors will prevail. O the appoitmet of a liquidator, all the powers of the maagemet cease except isofar as they have bee sactioed by a geeral meetig of directors. The Compaies Bill proposes that i the case of a volutary widig up, a liquidator would be chose from amog the pael selected by the Cetral Govermet. The proposed role of the Tribual i a volutary widig up as evisaged uder the Compaies Bill is that the Tribual may pass a order, upo the applicatio of a member/shareholder or creditor, to determie ay questio relatig to the widig up or exercise ay other power that the Tribual may have, if the widig up is beig coducted by the Tribual. Power to make calls o the cotributories The liquidator may exercise the powers of the Court i makig calls o cotributories i the course of the widig up of the compay. Uder the proposed Compaies Bill, the liquidator would have the right to adjust the rights of the cotributories, but ot to make calls. I order to make or eforce calls, a applicatio must be made by the liquidator to the Tribual, which may exercise its powers to make ad eforce calls o cotributories similar to the powers that the liquidator has whe coductig a compulsory widig up. Proposal: small busiess widig up The Compaies Bill proposes a summary widig up procedure for compaies that have assets less tha Rs. 10,000,000 o their books. The official liquidator may take cotrol of all assets ad actioable claims of the compay. It may the sell all assets withi sixty days from its appoitmet, ad call upo creditors to prove their claims withi thirty days from its appoitmet. 50 A guide to Asia Pacific restructurig ad isolvecy procedures

51 A creditor may file a appeal agaist the decisio of the official liquidator settlig his claims withi 30 days. Receivership Default rules for the appoitmet ad powers of a receiver are set out uder the Compaies Act ad the Civil Procedure Code, These rules may be altered by cotractual arragemet betwee the debtor ad its creditor(s) (or the represetatives of the creditor(s)). A receiver may be appoited for the beefit of the holders of debetures or bods for all or substatially all of the assets of the compay pursuat to a debeture trust deed or other istrumet. The role of the receiver is to protect the property charged i favour of the debeture-holders. The circumstaces i which this appoitmet may be made iclude: (i) where there is dager of property beig lost or dimiished i value; (ii) where arrears of pricipal ad/or iterest are to be paid; (iii) where the compay is beig liquidated or woud-up; ad (iv) where there are decrees ad judgmets agaist the compay. The receiver is a aget of the compay (ad ot of the debeture-holder). It coducts the compay s affairs, which icludes realisig debts, securities or other dues of persos whose iterests are secured by the debeture istrumet. A receiver may also be appoited with the leave of the Court by the debeture-holders. A receiver caot make or eforce calls if the compay is i liquidatio, because the official liquidator holds sole authority (uless the receiver has obtaied the leave of the Court i this regard). I most cases, the Court appoits the official liquidator as the receiver. Further, a civil court is competet to appoit a receiver over ay property at its discretio, where it appears to the civil court to be just ad coveiet. The civil court also has the discretioary power to trasfer possessio or custody of the property from its ower to the receiver, ad/or to cofer upo the receiver powers for: (a) the istitutio or defese of a suit; (b) realisatio, maagemet, protectio, preservatio ad improvemet of the isolvet party s property; (c) the collectio of rets ad profits; (d) the applicatio ad disposal of such rets ad profits; (e) executio of documets; ad/or (f) such other power as the Court thiks fit. Reorgaisatio or Compositio Pla A compromise or arragemet may be proposed betwee a compay ad its creditors, or a compay ad its shareholders. Followig a applicatio from the compay, its creditors or shareholders, or the liquidator (durig liquidatio), the Court has discretio to call a meetig of creditors ad shareholders of a compay. If a compromise or arragemet is approved by majority vote (75% i value) of the creditors or the shareholders (as the case may be), the the Court may sactio the scheme of compromise or arragemet, which shall the become bidig o all the creditors, shareholders ad cotributories of the compay. A guide to Asia Pacific restructurig ad isolvecy procedures 51

52 Priority of Distributios Uder the Compaies Act, the order of priority i which the debts of the compay are distributed is as follows: (a) all reveues, taxes, cesses ad rates due from the compay to the Cetral or State Govermet or ay local authority; (b) all wages or salaries payable to the compay s employees (other tha workme), icludig holiday remueratio ad providet fud ad pesio fud dues, subject to the limit otified for this purpose by the Cetral Govermet; These debts will rak equally amog themselves ad i the evet of isufficiet assets of the compay, shall have priority over the claims of debeture-holders uder ay floatig charge created by the compay. (c) usecured creditors icludig debeture-holders uder a floatig charge; (d) preferece shareholders; ad (e) equity shareholders. Secured Creditors A secured creditor may choose to stad wholly outside the widig up proceedigs ad seek to realise his security, or he ca opt to reliquish his security ad prove his debt, i which case he would be raked i parallel to a usecured creditor. If the secured creditor or secured debeture-holder chooses to realise his security, the employee liabilities are statutorily required to be paid proportioately from the proceeds i proportio to their liabilities. The SARFAESI, which deals with the rights of recovery ad eforcemet by secured creditors, 52 A guide to Asia Pacific restructurig ad isolvecy procedures provides that where a compay is i liquidatio, the secured creditor may, with the leave of the Court, retai the sale proceeds of his secured asset upo depositig the employee liabilities with the official liquidator. The official liquidator is required to itimate the existece of ad the actual or estimated amout of employee liabilities to the secured creditor. Where the secured creditor deposits a estimated amout of employee liabilities, it will be liable for ay shortfall ad etitled to a refud for ay over-paymet oce the employee liabilities have bee fialised. If the proceeds of the security are isufficiet to discharge the debt owig to the secured creditor, icludig because of the paymet of employee liabilities, the balace of the debt usatisfied will rak as a usecured claim. Thereafter, the extet of the debt usatisfied, due to the paymet of the employee liabilities or the amout of the employee s portio i the security of the secured creditor, whichever is lesser, shall rak pari passu with the employee liabilities, ad such secured creditor ad the employee would have to be paid from the other assets of the compay i priority to all other debts. For the balace of the amout which could ot be covered by the security, such secured creditor will rak as a ordiary creditor ad will have to prove his debt. Director Liability The officers of the compay which is beig woud up may be subject to pealties, icludig imprisomet ad fies, for ot cooperatig with the liquidator ad ot providig all relevat iformatio about the compay ad its debts, or ot deliverig property or books ad records of the compay that may be i his cotrol. Officers are also liable to imprisomet or fies if they itetioally: (a) coceal or frauduletly remove ay property of the compay; (b) make material omissios regardig the

53 compay; (c) coceal, mutilate or destroy the books ad records of the compay or are privy to ay of the foregoig; (d) trasfer ay of the property of the compay; or (e) obtai credit o behalf of the compay or make ay false represetatios o behalf of the compay. Additioally, there are pealties for the falsificatio of accouts ad improper maiteace of accouts. Voidable Trasactios The priciple of fraudulet preferece is cotaied i Sectio 531 of the Compaies Act. Uder the Compaies Act, the Court or the official liquidator ca set aside ay trasfer of property, paymet, or property-related trasactio effected i the six moths prior to the commecemet of the widig up with the itetio of preferrig a particular creditor. Therefore, i the evet of a widig up, ay paymet made by the compay which satisfies the requiremets of Sectio 531 of the Compaies Act could be deemed to be a fraudulet preferece ad cosequetly be ivalidated by the Court or official liquidator. However, a paymet/trasactio which was etered ito withi a period of six moths prior to the commecemet of the widig up will ot be presumed to be a fraudulet preferece merely because it was etered ito withi a period of six moths prior to the commecemet of widig up. The followig factors have bee held by Idia courts to be ecessary to establish a trasactio which costitutes a fraudulet preferece uder the Compaies Act: (a) the domiat itet of the debtor must be to prefer a particular creditor; ad (b) the preferece must be the result of a act of free will. I the evet of a fraudulet preferece, the liquidator is etitled to recover moey or property paid to ay perso who has bee frauduletly preferred. I additio, the directors of a compay who make paymets by way of a fraudulet preferece may be joitly ad severally liable to repay such preferred amouts. The burde of provig that a trasactio is a fraudulet preferece is o the party (e.g. the creditor or a liquidator) who wats the Court to ivalidate the trasactio. Guaratees Idia compaies may issue fiacial or performace guaratees i relatio to the obligatios udertake by aother compay (whether or ot the other compay is related to the guarator compay). There are, however, certai restrictios that apply to the issue of such guaratees. Uder the Compaies Act, for istace, a public limited compay may ot issue a guaratee should its value exceed 60% of its paid-up share capital ad free reserves, or 100% of its free reserves (whichever is higher), uless a special resolutio has bee passed by the shareholders of the compay. These limits are ot applicable i certai circumstaces such as where guaratees are issued by private limited compaies, or where a holdig compay provides a loa to its wholly owed subsidiary. Moreover, sice Idia is a exchage-cotrolled jurisdictio, cross-border guaratees are subject to compliace with the Foreig Exchage Maagemet Act, 1999 ad the related rules ad regulatios. Therefore, Idia subsidiaries will ot, geerally speakig, be permitted to issue guaratees for obligatios of their direct or idirect foreig paret etities without regulatory approval. A guide to Asia Pacific restructurig ad isolvecy procedures 53

54 Powers ad duties of the liquidator Uder the Compaies Act, the liquidator is empowered to pay ay classes of creditors i full, make compromises ad arragemets with creditors or other persos to whom the compay may have ay liabilities, ad cause a complete discharge of the compay s liabilities ad claims. The liquidator may also make ay calls regardig ay claims or debts due to the compay. The liquidator is also permitted to disclaim certai property of the compay desigated to be oerous property. Oerous property is defied as: (a) lad of ay teure, burdeed with oerous coveats; (b) shares or stock i compaies; (c) ay other property which is usaleable or is ot readily saleable, by reaso of bidig the possessor either to the performace of ay oerous act or the paymet of ay sum of moey; or (d) uprofitable cotracts. If a perso iterested i ay oerous property applies to the liquidator, iquirig whether or ot the property will be disclaimed, ad the liquidator does ot respod withi 28 days or ay exteded time permitted by the Court, the liquidator shall be deemed to have adopted the oerous property ad will be required to discharge it durig the widig up proceedigs. If the liquidator has defaulted i makig ay filig or givig ay otice it is required by law to give, a creditor, member or the Registrar of Compaies may make a applicatio to the Court requirig it to remedy the default, ad the costs of the applicatio will be bore by the liquidator. Additioally, pealties may be imposed o the liquidator. The Compaies Bill proposes to expad the powers of the liquidator. I additio, it proposes that a official liquidator appoited by the Tribual may be removed ad replaced o the grouds of fraud, miscoduct, icompetece or coflict of iterest, who may, i the case of a volutary widig up, be fied up to INR100,000. New moey ledig Idia law does ot provide special or preferetial treatmet to ew moies i the course of suspesio of paymets, reorgaisatio or compositio. That said, whe the High Court (i whose jurisdictio the registered office of a compay is located) passes a order sactioig a compromise or a arragemet i respect of a compay, it may pass additioal orders ad give directios i regard to ay matter it cosiders ecessary for the proper workig of the reorgaisatio or compositio (icludig matters relatig to the treatmet of moies provided durig ay reorgaisatio/compositio). Such a order may also provide for the trasfer of ay moies, property or liabilities to the trasferee-compay. Whe a widig up order has bee passed or where a provisioal liquidator has bee appoited, the liquidator takes custody of all the property, effects ad actioable claims to which the compay is etitled. The Court may also require ay cotributory, trustee, receiver, baker, aget, officer or other employee of the compay to pay ay moey uder his or her cotrol (to which the compay is o its face etitled) to the liquidator. 54 A guide to Asia Pacific restructurig ad isolvecy procedures

55 Recogitio of foreig isolvecy proceedigs Idia isolvecy laws do ot have ay extra-territorial jurisdictio, or do they provide for the recogitio of foreig isolvecy proceedigs. The UNCITRAL Model Law o Cross-Border Isolvecy caters for this deficiecy ad deals with the recogitio of foreig isolvecy proceedigs. Idia has bee cosiderig the adoptio of the UNCITRAL Model Law o Cross-Border Isolvecy to equip Idia law with the ability to deal with issues relatig to cross border isolvecy. A guide to Asia Pacific restructurig ad isolvecy procedures 55

56 Idoesia 56 A guide to Asia Pacific restructurig ad isolvecy procedures

57 Idoesia Cotributed by Mochtar Karuwi Komar Mulyaa, Parter Sadi Adila, Seior Associate 14th Floor Wisma Metropolita II Jl. Jed. Sudirma Kav. 31 Jakarta 12920, Idoesia T: F: , Key Elemets: Bakruptcy or suspesio of debt paymets ivolves appoitmet of a curator or a admiistrator. Moratorium available (ad exteds to secured creditors). Suspesio of debt paymets procedures focuses o compay rescue. Cram dow of creditors available. Itroductio This sectio provides a geeral outlie of the mai corporate isolvecy procedures i Idoesia. Idoesia s isolvecy law is primarily govered by Law No. 37 of 2004 o Bakruptcy ad Suspesio of Debt Paymets (the Bakruptcy Law ) ad supplemeted by Law No. 40 of 2007 o Limited Liability Compaies (the Compay Law ). The Bakruptcy Law applies to both corporatios ad idividuals. The Bakruptcy Law is both rehabilitative ad distributive i ature. There are two types of proceedigs which may be istituted uder the Bakruptcy Law: (1) bakruptcy; ad (2) suspesio of debt paymets. I bakruptcy, the debtor s assets are liquidated ad distributed to creditors based o their respective priorities. Suspesio of debt paymets provides the debtor with relief agaist creditors by way of a moratorium to allow the debtor to reorgaise ad cotiue its busiess o terms agreed by the creditors. Isolvecy Procedure Isolvecy procedures i Idoesia are commeced through the Commercial Court by the filig of: (1) a bakruptcy petitio; ad/or (2) a applicatio for suspesio of debt paymets. If the bakruptcy petitio ad the applicatio for suspesio of debt paymets are brought cocurretly, the petitio for suspesio of debt paymets must be adjudicated upo first. If the petitio for suspesio of debt paymets is submitted after the bakruptcy petitio, i order to be adjudicated upo first, it must be submitted at the first sessio of the bakruptcy petitio examiatio. Bakruptcy petitio The procedure for filig a bakruptcy petitio is based o the due date of the upaid debt. The Commercial Court may declare a debtor bakrupt where it has two or more creditors, has ot paid at least oe of its debts that have falle due ad those facts ca be prove simply. To prevet a debtor from disposig of its assets ad prejudicig the iterests of the creditors, the petitioer may file a petitio with the Commercial Court to seize all or part of the assets of the debtor. The Commercial Court may also appoit a iterim curator to supervise the maagemet of the busiess of the debtor, the paymet of its creditors, ad the assigmet or ecumbrace of the debtor s assets, which i bakruptcy falls uder the authority of the curator. A guide to Asia Pacific restructurig ad isolvecy procedures 57

58 The followig persos may submit a bakruptcy petitio to the Court: the debtor; oe or more creditors of the debtor; the Public Prosecutor, if the matter is of public iterest; the Bak of Idoesia (i.e. the cetral bak), i the istace that the debtor is a bak as defied uder Idoesia bakig law; the Idoesia Capital Market ad Fiacial Istitutios Supervisory Authority (previously kow as the Capital Market Supervisory Authority), if the debtor is a securities compay, stock exchage compay, clearig ad custodia istitutio, or settlemet ad depository istitutio; ad the Miister of Fiace, if the debtor is a isurace compay, a reisurace compay, pesio fud or state owed eterprise egagig i a field of public iterest (i.e. a eterprise whose etire capital is owed by the state ad is ot divided by shares). The creditor must be represeted by a lawyer qualified uder Idoesia law, uless the petitio is filed by the Public Prosecutor, the Bak of Idoesia, the Idoesia Capital Market, the Fiacial Istitutios Supervisory Authority, or the Miister of Fiace. The Commercial Court will had dow a decisio withi sixty days of the petitio s registratio date. If the Commercial Court accepts the petitio, it may declare the debtor bakrupt ad appoit a supervisory judge ad a curator (receiver). A appeal of the decisio by the Commercial Court ca be made to the Supreme Court. 58 A guide to Asia Pacific restructurig ad isolvecy procedures If the Commercial Court s decisio is appealed, the bakruptcy will cotiue, with the curator resposible for the maagemet of the compay ad the settlemet of ay claims util the Supreme Court hads dow its decisio. If the bakruptcy declaratio is reversed by the Supreme Court, ay actios take by the curator prior to the otice of cacellatio will remai valid ad bidig upo the debtor. The curator is required to take all ecessary steps to preserve the bakrupt estate ad will atted to the realisatio of the compay s assets, review the creditors claims, ad co-ordiate their acceptace i cojuctio with the supervisory judge. It will also atted to the distributio of fuds to creditors accordig to their respective priorities. The scale of fees for curators is determied by a pael of judges after the bakruptcy has bee cocluded, ad is based o the remueratio guidelies specified by the Miisterial Regulatio, which curretly icludes fees ragig from 1% to 8% of the value of the bakrupt estate. Uder the ew Miister Regulatio issued o 11 Jauary 2013, i case the bakruptcy declaratio is cacelled by the Supreme Court at the level of cassatio or civil review, the fees of the curators must be bore by the petitioer. The Bakruptcy Law imposes persoal liability o a curator for ay loss to the bakrupt estate caused by the fault or egligece of the curator i performig his duties. Effect of bakruptcy declaratio A bakruptcy declaratio does ot automatically deem that the debtor is isolvet. Uder the Bakruptcy Law, a debtor may be declared bakrupt by the Commercial Court if it has two or more creditors ad has ot paid at least oe of its debts that have falle due. Upo the issuace of a bakruptcy declaratio, however, the

59 debtor forfeits the right to maage its assets. The maagemet ad settlemet of the bakrupt estate, which icludes all assets of the bakrupt debtor together with ay assets acquired post-bakruptcy, will be carried out by the appoited curator. Whilst secured assets are ot icluded i the bakrupt estate, secured creditors are preveted from executig their rights for a maximum period of 90 days from the date of the bakruptcy declaratio. Such a stay does ot apply to eforcemet of security i the form of cash. The secured creditors ca eforce their security by sellig the ecumbered assets through public auctio or they ca ask for the assistace of the court. The curator may temporarily cotiue to operate the debtor s busiess subject to approval of the supervisory judge. I doig so, it may borrow fuds secured agaist ay of the debtor s uecumbered assets. Ay cotract etered ito by the debtor after the declaratio of bakruptcy may ot be paid from the assets of the bakrupt estate, uless it is for the estate s beefit. The curator may brig or defed lawsuits cocerig the rights ad obligatios of the debtor. The curator may eter ito ew agreemets or adopt pre-bakruptcy agreemets with third parties, who as a result become creditors of the compay with priority to repaymet over pre-petitio liabilities. The curator may also termiate employmet cotracts, leases ad other agreemets. I relatio to leases, the curator may oly termiate accordig to the otice period stipulated i the lease. I the evet that advace paymets have bee made, the lease may ot be termiated prior to the expiry of the period covered by the paymets. The Bakruptcy Law does ot specify a timeframe withi which a curator may termiate cotracts, although the supervisory judge may determie the timeframe. Losses or damages arisig as a result of a curator ot adoptig a pre-bakruptcy cotract are treated as usecured claims agaist the bakrupt estate. Legal proceedigs agaist a debtor will fall by operatio of law. Legal actio commeced by the debtor prior to the bakruptcy may be adjoured by the defedat i order to afford the curator the chace to cosider whether to proceed with the actio. The Bakruptcy Law does ot specify the timeframe i which a curator must respod to temporary adjourmets of legal proceedigs. A secured creditor, amely oe who possesses a lie, security iterest, mortgage or other collateral right, may eforce its rights durig bakruptcy save for durig the first 90 days, durig which a stay of eforcemet of security exists. This stay of proceedigs is ot applicable to creditors who possess security over cash deposits or the right to set-off debts. Creditors who eforce their security must accout to the curator for the balace of ay proceeds remaiig after paymet of the debt, iterest ad costs of realisatio due to the secured creditor. Creditors claims Withi 14 days from the declaratio of bakruptcy, the supervisory judge will determie the deadlie for the filig of creditors claims ad the time ad place of the creditors meetig for the verificatio of such claims. The curator will otify the creditors i writig withi five days of the determiatio of this date. The first creditors meetig must be held withi 30 days from the date of the bakruptcy declaratio. The creditors may also establish a creditors committee to cosult with the curator. The curator is obliged to obtai istructios from the creditors committee o certai matters, but A guide to Asia Pacific restructurig ad isolvecy procedures 59

60 it is ot boud by the advice of the committee. If the curator does ot agree with the istructios of the creditors committee, the creditors committee may request the supervisory judge to decide the matter. The creditors claims must be submitted i writig to the curator, idicatig the amout ad the ature of the debt, ad must be accompaied by evidece substatiatig the amout. The curator will determie which claims are acceptable ad eter them ito a list of ackowledged debts, which will be legally eforceable o bakruptcy. The curator is required to provide copies of the lists of accepted claims ad cotested claims to the creditors ad otify them of the time ad place for the debt verificatio meetig. Creditors have the right to request iformatio from the curator i relatio to their claim. The cotested claims will be settled i a separate hearig before the court. Suspesio of debt paymet procedures The suspesio of debt paymets process is a court-supervised rehabilitative mechaism which provides the debtor with time to put forward a settlemet ad debt restructurig proposal for creditors to cosider whilst the debtor is uder the protectio of a moratorium. Paymets to creditors may be suspeded for a maximum period of 270 days. A debtor may also volutarily apply for a suspesio of debt paymets, for the purpose of submittig a compositio pla that will iclude a offer of paymet to usecured creditors for all or part of its debts. The petitio for the suspesio of paymets may be filed by: the debtor; oe or more creditors of the debtor; 60 A guide to Asia Pacific restructurig ad isolvecy procedures the Bak of Idoesia, i the istace that the debtor is a bak as defied by Idoesia s bakig laws; Idoesia s Capital Market ad Fiacial Istitutios Supervisory Authority, i the istace that the debtor is a security house, stock exchage compay, clearig ad custodia istitutio or settlemet ad depository istitutio; or the Miister of Fiace, i the istace that the debtor is a isurace compay, a reisurace compay, pesio fud or state owed eterprise egagig i a field of public iterest. Effect of suspesio of debts If the debtor files the petitio, the court will grat a temporary suspesio of debt paymets ad appoit a supervisory judge ad oe or more idepedet admiistrators, who will, with the debtor s maagemet, joitly maage the debtor s assets. If the petitio is filed by a creditor, the court will, withi 20 days from the date of filig the petitio, grat temporary suspesio of debt paymets uless the court accepts the debtor s objectio. The admiistrator must immediately aouce the decisio o the provisioal suspesio of debt paymets i the Official Gazette of the Republic of Idoesia ad i at least two daily ewspapers desigated by the supervisory judge. The aoucemet must iclude a ivitatio to creditors to atted a court proceedig for the purpose of approvig or rejectig the debt settlemet pla proposed by the debtor. The creditors meetig must be coducted withi 45 days from the date the temporary suspesio of debt paymets order was made. The supervisory judge will chair the meetig ad each creditor is etitled to be heard. If the compositio pla is attached to the petitio for temporary suspesio of debt paymets, a vote o

61 whether to accept the pla may take place. Alteratively, at the request of the debtor, the creditors will decide whether to grat or refuse a permaet suspesio of debt paymets with the itetio of allowig the debtor, admiistrator ad creditors time to cosider ad agree to a compositio pla at a future meetig. The maximum period for both the temporary ad permaet suspesio of debt paymets together is 270 days. If the creditors decide ot to grat a permaet suspesio of debt paymets, the debtor will be declared bakrupt. The gratig of the permaet suspesio of debt paymets ad extesio i which the debtor is required to submit a compositio pla requires the approval of: (i) more tha half of the usecured creditors who are preset at the hearig ad who represet at least two-thirds of usecured claims; ad (ii) more tha half of the secured creditors who are i attedace at the hearig ad who represet at least two-thirds of secured claims. The suspesio of debt paymets gives rise to a moratorium over usecured claims, as well as a stay of proceedigs over ay legal actios commeced agaist the debtor. Debt paymets due to secured creditors are ot suspeded, however secured creditors ad creditors with preferred rights over certai assets of the debtor are subject to a moratorium ad stay of proceedigs. The admiistrator may disclaim cotracts etered ito by the debtor with third parties prior to the suspesio of debt paymets. The party cotractig with the debtor is obliged to seek cofirmatio from the admiistrator as to whether he or she will cotiue or termiate the cotract. A cotractig party may submit a claim for damages arisig from the termiatio of a cotract which will rak as a usecured debt. Oce a compositio pla has bee prepared ad preseted to the creditors, the creditors will vote o the pla. Adoptio of the pla, which is bidig o all creditors, requires the approval of: (i) more tha half of the usecured creditors who are preset at the hearig ad who represet at least two-thirds of usecured claims; ad (ii) more tha half of the secured creditors who are i attedace at the hearig ad who represet at least two-thirds of secured claims. Accordig to the Bakruptcy Law, a request to termiate the suspesio of debt paymets process may be iitiated by the supervisory judge, oe or more creditors, or the Commercial Court i the followig circumstaces: (i) the debtor acts i bad faith i operatig the busiess durig the suspesio of paymet process; (ii) the debtor attempts to prejudice the rights of its creditors; (iii) the debtor egages i coduct resultig i ew obligatios without the admiistrator s approval; (iv) the debtor fails to perform obligatios imposed by the court or the admiistrator; (v) durig the period of suspesio of debt paymets, the coditio of the debtor s busiess substatially deteriorates to the extet that it is evidet that it is ot i the iterest of creditors for the suspesio of debt paymets to cotiue; or (vi) the coditio of the debtor is such that it caot be expected to satisfy its obligatios. A applicatio for the termiatio of suspesio of debt paymets is heard by the court i the presece of the applicat, the debtor (via legal cousel) ad its directors. If the debtor makes the applicatio, the admiistrator, creditors ad the debtor s maagemet will be preset ad argumets will be made for ad agaist the applicatio. If the court termiates the suspesio of debt paymets process, the debtor is the declared bakrupt. A guide to Asia Pacific restructurig ad isolvecy procedures 61

62 Director liability The Bakruptcy Law cotais civil sactios. If a debtor is declared bakrupt ad does ot have sufficiet assets to satisfy its liabilities, the directors may be held persoally liable for ay losses uless it ca be established that the losses were ot directly attributable to their egligece. The breach of ay director s duties will also give rise to civil pealties uder Idoesia law. Crimial sactios uder the Idoesia Crimial Code may also be imposed o the directors of a bakrupt compay. For example, a director may face crimial sactios if he authorised or permitted the icurrig of further obligatios at a time whe bakruptcy was ievitable. Guaratees A Idoesia limited liability compay ca provide a guaratee subject to obtaiig the required corporate approval as set out i the compay s articles of associatio ad provided there is also a corporate beefit. A guaratee may be susceptible to challege if it is grated by a potetially bakrupt compay. Priority Secured creditors have a priority claim over the proceeds of the sale of ay ecumbered assets that have bee secured i their favour. The priority of claims i descedig order is broadly set out as follows: court costs of foreclosure of movable ad immovable goods, which are to be paid from the proceeds of such foreclosure ad ejoy priority over all secured claims ad privileged claims pursuat to the Idoesia Civil Code; tax lies; secured creditors (pledgees, mortgagees, fiduciary trasferees ad fiduciary assigees); creditors holdig privileged claims uder the Idoesia Civil Code ad employee etitlemets uder the Idoesia Mapower Law; all remaiig claims. Claims deomiated i foreig currecies are determied by the prevailig exchage rate o the date of bakruptcy ad must be expressed i Idoesia Rupiah. New moey ledig The curator is able to borrow fuds either o a usecured basis, or o a secured basis agaist ay uecumbered assets of the debtor. Cross-border isolvecy Foreig creditors claims are recogised o the same basis as the claims of Idoesia creditors. There are o additioal requiremets for foreig creditors claims to be recogised by Idoesia Courts except that, i practice, such claims ad their supportig documetatio are usually required to be traslated ito ad submitted i Idoesia. The Bakruptcy Law adopts uiversal priciples with respect to cross-border isolvecy issues arisig from a bakruptcy i Idoesia, so that local bakruptcy proceedigs cover the assets of the debtor located outside Idoesia. However, Idoesia law 62 A guide to Asia Pacific restructurig ad isolvecy procedures

63 adopts the territorial effectiveess priciple with respect to bakruptcy proceedigs commeced i foreig courts. As a result, foreig isolvecy decrees, orders or declaratios will ot be recogised i Idoesia Courts or directly impact upo assets of the debtor located i Idoesia. Foreig court judgmets with respect to eforcemet of a debt or attachmet to assets of a Idoesia debtor are ot recogised by Idoesia Courts uless provided for by specific treaty arragemets. At preset, there are o existig treaties with respect to isolvecy laws. The Courts may, however, cosider these claims as part of legal actio commeced i Idoesia Courts. Foreig debtors who obtai a judgmet i a foreig court agaist a Idoesia debtor will eed to commece local proceedigs i the Idoesia Courts i order to eforce the judgmet agaist the assets of the Idoesia debtor. A guide to Asia Pacific restructurig ad isolvecy procedures 63

64 Japa 64 A guide to Asia Pacific restructurig ad isolvecy procedures

65 Japa Cotributed by Clifford Chace (Tokyo office) Key Elemets: Civil rehabilitatio is a debtor-i-possessio reorgaisatio process Debtor-i-possessio fiacig available i certai circumstaces Ijuctio available to stay proceedigs Itroductio This sectio provides a geeral outlie of the mai corporate isolvecy procedures i Japa. Uder Japaese isolvecy law, there are four types of statutory proceedigs. These are divided ito procedures for the reorgaisatio ad rehabilitatio of the debtor, ad termial proceedigs that ed i the liquidatio of a corporatio. Procedures for the liquidatio of compaies: (1) Bakruptcy (hasa) is a proceedig of last resort for a debtor uder the Bakruptcy Law (hasa ho), whether as a origial proceedig or as a cosequece of the failure of corporate reorgaisatio, civil rehabilitatio or special liquidatio. This procedure aims to completely dissolve the isolvet busiess, liquidate the debtor s assets ad distribute the realised cash to creditors o a pro rata basis. (2) Special liquidatio (tokubetsu seisa) is a corporate liquidatio procedure uder the Compay Law (kaisha ho). This procedure is used whe a special resolutio of a shareholders meetig has bee passed to dissolve a compay that is suspected to have excessive debts. Procedures goverig reorgaisatio/rehabilitatio: (1) Corporate reorgaisatio (kaisha kosei) uder the Corporate Reorgaisatio Law (kaisha kosei hou) is iteded to be used for the rehabilitatio of large corporate debtors ad cotais some sigificat limitatios o the rights of creditors. Its purpose is to maitai ad reorgaise the debtor s busiess by (i) chagig the compay s structure, ad (ii) restrictig the rights of both secured ad usecured creditors agaist the debtor. (2) Civil rehabilitatio (miji saisei) aims to implemet fair, orderly ad efficiet proceedigs for the rehabilitatio of corporate debtors ad idividuals. This optio has bee available sice 1 April 2000 uder the Civil Rehabilitatio Law (miji saisei hou), which replaces the ow defuct Compositio Law (wagi hou). The Recogitio ad Aid for Foreig Isolvecy Proceedigs Law (gaikoku tosa shoi tetsuduki o shoi ejo i kasuru horitsu) provides procedures for dealig with foreig court isolvecy proceedigs of multi-atioal eterprises. I additio to the above, a o-statutory volutary arragemet (i-i seiri) is commoly used for the liquidatio/dissolutio or rehabilitatio of isolvet compaies. Bakruptcy (hasa) All types of compaies ad idividuals (icludig foreig compaies ad idividuals) may be the subject of bakruptcy proceedigs. The proceedigs apply to the debtor s assets located both iside ad outside Japa (i the case of assets outside Japa, the recogitio of Japaese isolvecy A guide to Asia Pacific restructurig ad isolvecy procedures 65

66 proceedigs i the foreig coutry is required). The Bakruptcy Law is applicable to a foreig compay, so log as the foreig compay has assets i Japa. Furthermore, claims which may be eforced uder the Civil Procedure Code (miji sosho hou) are deemed to be located i Japa. If a compay (a) is uable to meet its paymet obligatios as they fall due (shiharai fuou), (b) suspeds paymet of its debt (shiharai teishi) (uless there is evidece that the compay is able to meet its paymet obligatios), or (c) has total liabilities that exceed the value of its assets (saimu choka), a petitio for bakruptcy ca be filed by: (i) ay of the compay s creditors; (ii) ay of the compay s directors (i case the debtor is a joit-stock compay (kabusiki kaisha; KK ); or (iii) the compay itself. Followig the submissio of a petitio, the court will cosider whether there are sufficiet grouds for bakruptcy. If the debtor files a petitio for bakruptcy, the court will geerally require a lower stadard of proof tha if the petitio was lodged by a creditor. Uder Japaese law, the filig of the petitio for bakruptcy itself does ot cause a automatic stay to be imposed. Therefore, there is a risk period betwee the time of filig the bakruptcy petitio ad the makig of the commecemet order. I order to protect the debtor s estate, the petitioer usually files a ijuctio at the same time that it files the bakruptcy petitio to avoid the situatio where creditors rush to the debtor to demad paymet, obtai security, or repossess goods by cacellig sales ad so forth. The ijuctio typically cotais a prohibitio agaist the dispositio of the debtor s assets, ad a prohibitio agaist collectio ad paymet of pre-ijuctio debts. Paymets of pre-ijuctio debts are ull ad void if the creditor was aware of the ijuctio at the time of the paymet. Therefore, the debtor should give otice of the ijuctio to all creditors that are likely to make fial efforts to collect or improve the positio of their claims. With the commecemet of a bakruptcy order, a bakruptcy trustee (hasa kazaii) is appoited by the court, usually from amog practisig attoreys. The trustee has the power to maage ad dispose of the property i the bakrupt estate (hasa zaida). The bakruptcy trustee s role is to esure fair treatmet of creditors icludig the right of avoidace, the right to set aside ad the right to set-off. Assets that belog to the bakrupt estate will be liquidated by the bakruptcy trustee with the permissio of the court ad distributed to creditors. Right of avoidace (hii ke) The bakruptcy trustee may avoid or set aside the paymet of debts, the creatio of a security iterest, the sale of a debtor s property for ufairly low prices, ad other dubious trasactios made after the debtor was i fiacial difficulty. Right to set aside (betsujo ke) Secured creditors retai the right to eforce their security iterest without complyig with the geeral procedures of the bakrupt estate. It is ot uusual, however, for the bakruptcy trustee ad a secured creditor to co-operate i order to sell secured assets volutarily. I additio, a ew system was itroduced i 2005 allowig the bakruptcy trustee to petitio the court to discharge such security iterests through the volutary sale of secured assets whe it would beefit the iterest of creditors geerally ad would ot ureasoably harm the affected secured creditors iterests. The secured creditor may recover its claim from the sale proceeds of the secured assets paid to the court i accordace with the priority of the security iterest, but a portio of the proceeds of the sale may be paid to the bakrupt estate at the request of the 66 A guide to Asia Pacific restructurig ad isolvecy procedures

67 bakruptcy trustee. The secured creditor may challege the petitio to dispose of the security iterest, ad is etitled either: (i) to declare that the creditor itself or some other party will purchase the property for a amout resultig i proceeds of 105% or more; or (ii) to foreclose the security iterest. Right to set-off (sousai ke) A creditor who also owes a debt to the debtor at the time of commecemet of the bakruptcy proceedigs is etitled to set-off such debt agaist its claim. However, debts owed to the debtor by a creditor ad claims obtaied by a creditor agaist the debtor arisig after commecemet of the bakruptcy proceedigs may ot be set-off. Priority of Claims The claims i bakruptcy proceedigs are broadly prioritised as follows: 1. Superior obligatios (zaida saike) superior obligatios have priority over claims of usecured creditors, ad iclude the costs ad expeses icurred i the course of the admiistratio of the bakrupt estate, pre-commecemet order taxes, upaid salary that accrued withi three moths prior to the commecemet of bakruptcy ad severace pay equivalet to three moths salary; 2. Priority bakruptcy claims (yuseteki hasa saike) upaid salary, bous ad severace pay; 3. Ordiary bakruptcy claims (ippa hasa saike) trade claims ad other claims without priority; 4. Subordiated bakruptcy claims (retsugoteki hasa saike) iterest, default iterest ad pealties that accrue after the bakruptcy proceedigs commece; ad 5. Cotractually subordiated bakruptcy claims (yakujo retsugo hasa saike) claims which were agreed to be subordiated to the above subordiated bakruptcy claims. After the creditors have submitted their claims, they will be examied by the bakruptcy trustee ad other creditors. At the claims hearig, which is held by the court whe ecessary, the bakruptcy trustee will admit or reject certai claims. The hearig will the cotiue with respect to claims that are ot admitted or rejected. Creditors may also raise objectios to other creditors claims. Creditors whose claims are rejected may appeal agaist the bakruptcy trustee s decisio. The directors who have breached the obligatio to act as good maagers or their fiduciary duty shall be joitly ad severally liable to idemify the compay for ay loss which may be icurred by the compay. The bakruptcy trustee may petitio for the assessmet of a compesatio claim which is a special procedure, or brig a stadard lawsuit to seek compesatio for damage caused by a director. The court may hold the creditors meetig at its discretio. At the creditors meetig, the bakruptcy trustee will report to the creditors the causes ad backgroud of the bakruptcy, the past ad preset status of the debtor ad the estate, ad other matters. Creditors may appoit at least three ad up to te represetatives to form a creditors committee (saikesha iikai) to represet the creditors views i court or to the bakruptcy trustee. Fially, whe the assets of the bakrupt estate have bee liquidated ito a sufficiet amout of cash for distributio, the creditors will be paid accordig to their respective priorities. A secured creditor, who retais access to the secured assets, is A guide to Asia Pacific restructurig ad isolvecy procedures 67

68 excluded from the distributio uless it proves that the claim amout became usecured after the bakruptcy proceedigs commeced, or the amout of deficiecy after foreclosure o the secured assets. Special liquidatio (tokubetsu seisa) This procedure is oly available for KKs. It is quicker tha a bakruptcy proceedig ad ca avoid a compay beig declared bakrupt. It also distributes the compay s remaiig assets to its creditors ad shareholders i a expeditious ad flexible maer. This procedure is ofte used by the paret compay to liquidate loss-makig subsidiaries. I order for special liquidatio to take place, the corporatio must first pass a resolutio for the dissolutio (kaisa) of the corporatio at a shareholders meetig, where the majority of issued ad outstadig shares are represeted. The resolutio must be supported by two-thirds (2/3) or more votes of the shares represeted. Upo the passig of the resolutio for dissolutio, the liquidatio proceedigs (seisa tetsuzuki) will commece ad the corporatio will appoit a liquidator (seisa i). The liquidator is required to give a public aoucemet, without delay, requestig creditors report their respective claims to the liquidator withi a give period (at least two moths). The same request will be mailed to creditors already kow to the corporatio. If it is suspected that the compay s liabilities exceed its assets, the liquidator is required to file with the court a petitio for special liquidatio. Creditors, statutory auditors ad shareholders may also petitio for a special liquidatio. A ijuctio may also be requested by the petitioer at the same time i order to preserve the assets durig the iterim period betwee the filig of the petitio ad the issuace of a commecemet order. 68 A guide to Asia Pacific restructurig ad isolvecy procedures The court shall make a order to commece special liquidatio if: (i) there are circumstaces that would seriously impede the liquidatio of the corporatio (such as a large umber of creditors or extremely complex rights ad obligatios ivolved), or there is a suspicio that liabilities exceed assets; ad (ii) there is a possibility of the successful termiatio of the proceedigs through cofirmatio of the pla for distributio or idepedet settlemet with all the creditors. Uder the special liquidatio procedure, the followig are suspeded ad o further proceedigs ca be commeced: (i) compulsory executio proceedigs ad orders; (ii) provisioal ijuctios; ad (iii) provisioal attachmet orders. The court may also susped ay bakruptcy proceedigs which may be pedig. Upo issuace of the commecemet order, the liquidator becomes the special liquidator who will be resposible for coductig the special liquidatio procedure for the beefit of the compay, creditors ad shareholders. Upo issuace of the commecemet order, the special liquidator disposes of the corporatio s assets ad collects its receivables, ad submits to the court a agreemet (kyotei) for distributio of the estate to creditors ad shareholders. Secured creditors have the right to eforce their security iterests outside the special liquidatio proceedigs (betsujo ke). There is o proof of claim proceedigs, ad the right of avoidace does ot apply. Creditors right to set off debts obtaied after the commecemet of the proceedigs, which are provided uder the Civil Code (mi pou) of Japa, may be restricted uder this procedure. Withi oe to two moths after the commecemet order has bee issued, a creditors meetig is coveed for the purpose of explaiig the compay s curret status ad the procedures for

69 special liquidatio. The special liquidator may submit a agreemet to the creditors meetig or settle with each creditor to liquidate the corporatio s assets ad distribute them to creditors equally accordig to their respective priorities. The agreemet is required to give all creditors substatially equal treatmet. The requiremet for distributio accordig to priorities is applied more flexibly tha i a bakruptcy sceario. Secured creditors ca joi the usecured creditors, or, i priciple, eforce their security iterest outside the special liquidatio proceedigs. The agreemet should also treat the remaiig liabilities as forgive so that the balace sheet of the corporatio shows o deficit. The agreemet must be approved at a creditors meetig by the majority of creditors preset ad by creditors with aggregate claims of two-thirds (2/3) or more of the total debt owed by the corporatio. If the agreemet is ot approved, the the bakruptcy proceedigs will commece at the court s discretio. Oce the agreemet is approved by the prescribed majority i a creditors meetig ad by the court, it becomes bidig o all usecured ad cosetig secured creditors. I priciple, the agreemet ca treat certai creditors preferetially, but i practice, this will make it difficult for the agreemet to be approved. If the agreemet is ot approved by creditors, the court may declare the corporatio bakrupt. Bakruptcy procedures will the apply. Whe the agreemet is fully performed, the corporatio s obligatios uder idepedet settlemets with creditors have bee discharged, or whe the liabilities of the corporatio o loger exceed the value of its assets, the court will order termiatio of the proceedigs. Whe the agreemet has bee fully performed, the corporatio ceases to exist. Corporate reorgaisatio (kaisha kosei) The corporate reorgaisatio process is oly available to KKs ad to foreig compaies of a similar ature with a busiess office i Japa, where (a) a compay is uable to pay its debts as they fall due without causig serious difficulties i cotiuig busiess or (b) evets may occur that could cause bakruptcy. The corporate reorgaisatio procedures apply to all compay assets located iside ad outside Japa (i the case of assets outside Japa, the recogitio of Japaese isolvecy proceedigs i a foreig coutry would be required). This procedure is usually oly suitable for large compaies due to the high cost ad legth of time required for its implemetatio. Accordigly, it is less frequetly utilised tha the civil rehabilitatio procedure. The followig parties ca make a applicatio to the court for corporate reorgaisatio: (i) the compay itself; (ii) (i the case of (a) above oly) creditors (whether secured or usecured) havig a claim equal to ot less tha oe-teth (1/10) of the amout of the share capital of the debtor; or (iii) (i the case of (a) above oly) shareholders with 10% or more votig rights of the compay s votig shares. After a applicatio has bee made, the court will cosider whether it is apparet that a reorgaisatio pla for the cotiuatio of the busiess is ulikely to be prepared, adopted or approved. As corporate reorgaisatio is maily used for large corporatios, the ivestigatio to determie whether a compay ca be reorgaised takes from approximately four weeks to several moths. I the meatime, the court will appoit a preservative admiistrator (hoze karii) to maage the busiess ad assets of the debtor. The preservative admiistrator has certai rights of avoidace ad ca elect to termiate existig cotracts. I additio, the court usually A guide to Asia Pacific restructurig ad isolvecy procedures 69

70 issues certai orders (hoze kari meirei) to preserve the assets of the corporatio. If the court fids probable grouds that the statutory requiremets for the rehabilitatio of the compay are satisfied, it may order the commecemet of the reorgaisatio. The court typically appoits two trustees (kazaii): oe lawyer ad oe busiessperso. The trustees are vested with the exclusive rights to maage ad cotrol the busiess ad assets of the debtor. The trustees may elect to rescid cotracts which remai to be performed or request performace by the other party i retur for due performace by the corporatio. Secured creditors may eforce their security iterest oly i accordace with the reorgaisatio proceedigs ad reorgaisatio pla. However, certai preferetial claims (kyoeki saike) may be paid outside the reorgaisatio proceedigs ad have priority over other creditors. Rights of set-off (sousai ke) ca be exercised util the deadlie for submissio of creditors claims, after which set-off is prohibited. The trustees prepare a reorgaisatio pla ad submit it to the court for approval. However, the compay, shareholders ad creditors who filed a claim may also submit plas. The reorgaisatio pla may iclude reschedulig of the compay s repaymets; reductio or loss of shareholders capital ad a list of secured ad usecured creditors waivig part of their claims. Classes of creditors ad shareholders vote o the reorgaisatio pla i a creditors meetig, ad each class has differet majority requiremets as follows: (a) Usecured Creditors The reorgaisatio pla shall be approved by usecured creditors havig votig rights (measured by the amout of the claim) equal to more tha a half (1/2) of the overall votig rights of the usecured creditors. (b) Secured creditors (i) ay grace period i respect of the paymet of secured claims shall be approved by secured creditors havig votig rights ot less tha two-thirds (2/3) of the overall votig rights of the secured creditors; (ii) the release of ay security iterests shall be approved by secured creditors havig votig rights ot less tha three-quarters (3/4) of the overall votig rights of the secured creditors; ad (iii) cessatio of the etire busiess of the debtor shall be approved by secured creditors havig votig rights ot less tha ieteths (9/10) of the overall votig rights of the secured creditors. For the purposes of the paragraphs (i) through (iii) above, the votig etitlemet of a secured creditor is the lower x of (x) the amout of that secured creditor s claim or (y) the market value of the assets securig that claim as of the date of commecemet of the proceedigs. (c) Shareholders The reorgaisatio pla shall be approved by shareholders havig rights equal to more tha a half (1/2) of the total votig rights of the shareholders. Oce the pla is approved by creditors, the court will also decide whether or ot to approve the pla. If o pla is approved, the court may declare the compay bakrupt or allow the compay to apply for civil rehabilitatio. Bakruptcy or civil rehabilitatio procedures will the apply. 70 A guide to Asia Pacific restructurig ad isolvecy procedures

71 Civil rehabilitatio (miji saisei) Civil rehabilitatio is Japa s oly debtor-i-possessio reorgaisatio procedure ad is broadly similar to the US Chapter 11 proceedigs. All types of compaies (icludig foreig compaies with a place of busiess i Japa) ad idividuals (icludig foreigers with coectios with Japa) are eligible. The civil rehabilitatio procedure was itroduced primarily for small ad medium-sized compaies, sice the corporate reorgaisatio procedure is available to larger compaies. However, a sigificat umber of large compaies have also used the civil rehabilitatio procedure for the reasos outlied above. If a compay (a) cosiders that evets may occur which could cause bakruptcy, or (b) appears to be uable, without causig material difficulty to its ogoig busiess, to pay its debts as they fall due, the compay itself or (i the case of (a) oly) the creditors may make a applicatio to the court for civil rehabilitatio. There is o miimum requiremet with regard to the amout of the creditors claim. Filig for civil rehabilitatio does ot have the effect of a automatic stay. I order to preserve the assets of the debtor durig the period betwee the filig of a petitio for the civil rehabilitatio proceedigs ad the commecemet of the proceedigs the debtor, or a creditor, may file a petitio for a ijuctio. The court may also issue a ijuctio o its ow accord, eve without ay petitio for a ijuctio beig filed. Meawhile, the court usually appoits a supervisor (katoku ii) who supervises the rehabilitatio process ad cosiders the fiacial ad busiess status of the compay to assist the court i determiig whether it is capable of rehabilitatio. Oce the court is persuaded that the requiremets for commecemet of civil rehabilitatio proceedigs have bee met, the court will order the commecemet of the proceedigs uless certai evets exist which persuade the court otherwise (e.g., it is clear that a civil rehabilitatio pla caot be formulated or approved by creditors, cofirmed by the court or where the filig was made for ufair purposes or otherwise lacked good faith). After the commecemet, provisioal ijuctios, all compulsory executio proceedigs ad orders, provisioal attachmets ad other specified procedures are suspeded. I civil rehabilitatio proceedigs, the debtor may cotiue to operate its busiess eve after commecemet of proceedigs, but the usual practice is for a supervisor to be appoited. Oly a supervisor with specific avoidace authority or a trustee ca exercise rights of avoidace. The supervisor may also rescid bilateral cotracts or request performace by the other party of its obligatios i retur for due performace by the compay. However, if the court cosiders that the maagemet of the debtor s assets is iappropriate or that it is ecessary for the rehabilitatio of the debtor s busiess, the court may appoit a provisioal admiistrator (chosa ii) or trustee (kazaii) to maage the busiess ad assets i certai circumstaces (ad the debtor will cease the day-to-day maagemet of the compay). Right to set aside (betsujo ke) Secured creditors have, i priciple, the right to eforce their security iterest outside the proceedigs. However, the court has the power to discharge a security iterest where the secured assets are idispesable for the cotiuatio of the debtor s busiess. I such a case, the compay may be free of the secured rights by depositig a amout of moey equivalet to the fair value of the collateralised assets with the court, if it fids that the assets are ecessary to rehabilitate the compay. A guide to Asia Pacific restructurig ad isolvecy procedures 71

72 Right to set-off (sousai ke) Creditors rights to set off debts created i good faith, which are provided uder the Civil Code of Japa, may be restricted uder this procedure. The debtor ad its creditors may propose rehabilitatio plas. The pla may iclude: (i) reschedulig the compay s repaymets; (ii) reductio or loss of shareholders capital; ad (iii) a list of secured ad usecured creditors prepared to waive part of their claims. For the pla to be approved, the coset of oe-half (1/2) or more i umber ad value of creditors preset or represeted at the creditors meetig, or votig by ballot, is required. Oce the pla is approved by creditors ad the court, the rights of usecured creditors are altered accordig to the pla. If a pla caot be approved or a approved pla turs out ot to be feasible durig the rehabilitatio process, the court may declare the compay bakrupt ad bakruptcy proceedigs will begi. The Civil Rehabilitatio Law has bee effective sice 1 April It geerally coforms to recet iteratioal practice to allow extra-territorial authority for liquidators or bakruptcy admiistrators. The law defies the rights of foreig liquidators or bakruptcy admiistrators who are etitled to make a applicatio to the court for civil rehabilitatio, atted creditors meetigs, ad to express their views at court ad/or creditor meetigs. Other procedures Special mediatio (tokutei chotei) Special mediatio aims to provide debt relief to potetially isolvet debtors through civil mediatio (miji chotei) proceedigs to achieve a agreemet betwee the debtor ad each idividual creditor, uder the court s supervisio. This is maily used by idividuals ad small compaies. 72 A guide to Asia Pacific restructurig ad isolvecy procedures Leder liability There is o statute specifically providig for leder s liability. Although the leder s liability issue has bee discussed as a geeral law matter, e.g. tort, there is presetly o established theory o this poit. Guaratees There is o law agaist the provisio of fiacial assistace i Japa. A borrower may receive a upstream guaratee from its Japaese subsidiaries if the Japaese subsidiaries are direct or idirect wholly-owed subsidiaries of the borrower. There is also o restrictio o a dowstream guaratee, provided there is some corporate beefit for the paret compay. New moey ledig If a preservatio order has bee issued by the court after a applicatio for corporate reorgaisatio or civil rehabilitatio proceedigs has bee made, the debtor compay caot borrow workig capital or other moey uless the court grats a special exemptio to do so. Debtor i possessio (DIP) fiace is provided by fiacial istitutios upo obtaiig a exemptio from the court. Furthermore, for the purpose of securig DIP fiace, debts arisig uder DIP fiace are give priority over the debts of other usecured creditors. For corporate reorgaisatio proceedigs, this also applies to secured creditors. For civil rehabilitatio proceedigs, however, debts uder DIP fiace do ot have priority over secured creditors i respect of the secured assets. Cross-border isolvecy As part of the comprehesive reform of Japaese isolvecy law, a ew legal framework exists with regard to cross-border isolvecy,

73 modelled o the UNCITRAL Model Law o Cross-Border Isolvecy. The ew legal framework has bee established by the eactmet of, amogst others, the Law cocerig Recogitio ad Aid for Foreig Isolvecy Proceedigs ( LRAF ) ad the Law to Amed a Portio of the Civil Rehabilitatio Law ( LACR ). These laws came ito effect i April Uder the LRAF, a foreig trustee who has the power to maage the busiess ad assets of the debtor i ay foreig jurisdictio (gaikoku kazaii) is ot grated ay right or privilege by his/her merely obtaiig recogitio of the foreig proceedigs i Japa. The foreig trustee must file a petitio for appropriate assistace o a case-by-case basis, ad obtai a court order for such assistace. The court will had dow a recogitio order if it is coviced that the foreig isolvecy proceedigs meet the ecessary requiremets for assistace i Japa (e.g. the debtor s address, residece, or busiess or other office exists i the coutry where the relevat foreig isolvecy proceedigs are pedig, the commecemet of the foreig isolvecy proceedigs have bee formally ordered ad where it is clear that assistace is ecessary uder LRAF for the foreig isolvecy proceedigs). Pursuat to a recogitio order, various orders will be haded dow accordig to ecessity. Examples of orders are: (i) a temporary suspesio order agaist a compulsory executio proceedig upo judgmet; (ii) provisioal attachmet or other ijuctio, lawsuit or admiistrative proceedig, with regard to the debtor s assets i Japa; (iii) a ijuctio prohibitig the debtor from disposig of assets ad makig paymets; ad (iv) other orders that the court deems appropriate. The court may order the foreig trustee is required to obtai the court s approval for ay dispositio or outboud delivery of the debtor s assets located withi Japa i order to protect creditors i Japa. A foreig trustee will lose its power to maage the busiess ad assets of the debtor where the foreig isolvecy proceedigs are termiated or where the requiremets for recogitio of foreig isolvecy proceedigs are o loger met. As a result of the reform of Japaese isolvecy laws, bakruptcy proceedigs ad the authority of a provisioal trustee ad trustee ow exted to the debtor s assets outside Japa. The isolvecy law reforms also implemet the hotchpot rule ay recovery of a creditor, obtaied by the exercise of its rights, from the debtor s assets located outside Japa shall be credited agaist paymet uder the proceedigs i Japa. Uder the LACR, the Japaese court has jurisdictio over a isolvecy proceedig, so log as the debtor has its address, offices, busiess or assets withi Japa. The LACR has also abadoed the mutuality priciple. The revised bakruptcy law provides equal treatmet to foreig parties regardless of whether the foreig party s home coutry provides reciprocal recogitio of isolvecy proceedigs iitiated i Japa. A guide to Asia Pacific restructurig ad isolvecy procedures 73

74 Korea 74 A guide to Asia Pacific restructurig ad isolvecy procedures

75 Korea Cotributed by Bae, Kim & Lee LLC Eui Jog (EJ) Chug, Parter, Bo Youl Hur, Parter, Aie Euah Lee, Seior Foreig Legal Cosultat 133 Tehera-ro, Gagam-gu Seoul Republic of Korea T: F: Key Elemets: Rehabilitatio procedure focuses o compay rescue Moratorium available Oerous treatmet of related trasactios Maagemet may retai degree of cotrol i rehabilitatio Out of court procedures available Itroductio This sectio is desiged to provide a geeral outlie of the mai corporate isolvecy procedures available i Korea. Isolvecy proceedigs i Korea are govered by the Debtor Rehabilitatio ad Bakruptcy Act ( DRBA ), which came ito force i April The DRBA is also referred to as the Cosolidated Isolvecy Act ; because it cosolidates the Corporate Reorgaizatio Act, the Compositio Act, the Bakruptcy Act ad the Act o the Rehabilitatio of Idividual Debtors. The DRBA provides for two corporate isolvecy procedures, amely rehabilitatio ad bakruptcy. Rehabilitatio is desiged to rehabilitate the debtor with creditor coset by providig debt reductios ad/or grace periods for the paymet of debts. This occurs by operatio of protective measures uder the supervisio of the court. Bakruptcy, o the other had, seeks to regulate the liquidatio of the debtor ad the fair distributio of the debtor s liquidated assets. We also briefly cosider out-of-court isolvecy procedures; amely the private workout arragemets for Korea fiacial istitutios, ad the statutory workout arragemet uder the Corporate Restructurig Promotio Act ( CRPA ). The ambit of this ote is limited to isolvecy procedures applicable to corporate etities, ad does ot exted to the isolvecy of idividuals. Rehabilitatio The rehabilitatio procedure uder the DRBA allows for streamlied ad expeditious corporate restructurig uder court supervisio. The mai steps uder the rehabilitatio proceedig are discussed below. Filig of applicatio A applicatio for corporate rehabilitatio may be filed i the followig circumstaces: (1) a compay is uable to pay its debts whe they fall due (uless restructurig of debt is ot possible, i which case, it may be more appropriate for the compay to go ito bakruptcy); (2) there is a legitimate fear that a compay will be isolvet (suspesio of paymet is deemed as isolvecy); or (3) there is a legitimate fear that the total debts of the compay will exceed its total assets. Compaies typically file for corporate rehabilitatio o a volutary basis. Creditors with claims equal to at least 10% of the debtor s total paid-i capital, or shareholders owig at least 10% of the total issued ad outstadig shares are also permitted to file for corporate rehabilitatio. A guide to Asia Pacific restructurig ad isolvecy procedures 75

76 Stay orders The filig for corporate rehabilitatio i Korea does ot itself trigger the official commecemet of corporate rehabilitatio proceedigs. The DRBA provides for a iterim period betwee the filig of the applicatio ad the official commecemet of the proceedigs, where the compay s assets are preserved for rehabilitatio ad distributio uder the rehabilitatio pla. The court must decide whether to grat a stay order withi seve days of filig the applicatio. This order geerally prohibits the debtor from takig certai steps or actios without the approval of the court, icludig repayig debts, disposig of property, or obtaiig ew loas. I certai exceptioal cases, the court will appoit oe or more iterim receiver(s) to maage the debtor durig the preservatio period. The commecemet order is issued withi oe moth of the filig of a applicatio for rehabilitatio proceedigs. I practice, therefore, i the absece of ay issue with the itegrity of the debtor s existig maagemet, there is geerally o eed to appoit a iterim receiver. The court may also, at its discretio or by applicatio of a iterested party, issue a comprehesive stay order. This will bar creditors from eforcig their claims i respect of the debtor s assets through compulsory executio, prelimiary attachmet or prelimiary ijuctio. This order will become effective upo service of the order o the debtor. Official commecemet of rehabilitatio proceedigs The court is required to decide whether to commece rehabilitatio proceedigs withi oe moth from the date of filig for corporate rehabilitatio. O the commecemet of corporate rehabilitatio, the court will appoit oe or more receivers, or replace ay iterim receiver with oe or more permaet receivers. Authority to maage the busiess operatios ad assets of the debtor shall vest i the permaet receiver, subject oly to the court s supervisio. Geerally, the represetative directors of the compay are appoited as receivers i the absece of ay cause for isolvecy attributable to such represetative directors. A cause for isolvecy geerally does ot stem from poor commercial decisios. Should a poor commercial decisio, however, made by a represetative director cause the fiacial coditio of the debtor to deteriorate sigificatly, the court may decide ot to appoit such represetative director as the receiver. The court will select the receiver from a pool of qualified cadidates (comprised of professioal busiess maagers ad officers) who have udertake special traiig recogised by the court office. Sice a creditor is a iterested party, the court will geerally avoid the appoitmet of a cadidate recommeded by a creditor. The court may also abstai from the decisio to appoit a receiver, ad istead permit the represetative director of the debtor to udertake the role. I practice, Korea courts ted to avoid the appoitmet of a receiver for large corporatios. This leads to icreased corporate autoomy for the debtor compaies that are subject to rehabilitatio proceedigs, because shareholders ad directors may at ay time resolve to reallocate the role. 76 A guide to Asia Pacific restructurig ad isolvecy procedures

77 Examiatio of fiacial status O the commecemet of corporate rehabilitatio, the court will appoit a examier (ormally a accoutig firm or a credit ratig agecy) to examie ad submit a report o, amogst other matters, the debtor s liquidatio value ad the goig-cocer value of its busiess, as well as the status of total assets ad its debt repaymet capability. If the court determies (based primarily o the fidigs of the examier s report) that the goig-cocer value of the busiess is higher tha its liquidatio value, it will order the receiver ad allow other iterested parties to submit a rehabilitatio pla. Iterested parties iclude ay legal perso that has reported to the court; such as the debtor itself, its shareholders, ad its secured ad usecured pre-rehabilitatio creditors. The examier will i tur coduct a feasibility review o the draft rehabilitatio pla, ad report whether the pla will guaratee the liquidatio value i the iterest of the creditors. If it fids, based o the examier s reports, that the goig-cocer value is less tha the liquidatio value of the busiess of the debtor, by applicatio of the debtor or ay iterested party above, the court will order the termiatio of the corporate rehabilitatio proceedigs ad may subsequetly order the commecemet of liquidatio proceedigs agaist the debtor. Filig of claims ad examiatio Ay creditor, secured or usecured, that seeks repaymet must file a report ad proof of its claim with the court withi a fixed time period. The DRBA provides that the receiver shall make ad submit a list of the secured ad usecured pre-rehabilitatio creditors. If a creditor is listed, the creditor shall be regarded as havig reported its claims. The date of submissio must be scheduled by the receiver betwee two weeks to two moths from the official commecemet date. Failure to report claims withi the specified period will geerally discharge the debtor from its obligatios i this respect. The creditor must file all iformatio ad documets givig rise to the uderlyig claim i a court-prescribed form. This icludes the claim amout, whether the claim is secured, whether legal proceedigs have bee commeced i relatio to such claim, whether there is a legal preferetial right (such as a tax claim) grated i respect of the creditor s claim, ad ay other material iformatio. Iterested parties, such as the receiver, debtor ad other creditors, may examie ad object to each claim filed durig the prescribed period. The examiatio will oly look to whether the claim exists. Other matters, such as the seiority of the claim (or whether a claim should be equitably subordiated), are subject to later review. If a claim is deied, it will be excluded from the rehabilitatio pla, uless the claimat successfully challeges the deial through cofirmatory proceedigs. As a geeral rule, ay creditor whose claim agaist the debtor arose prior to the commecemet of rehabilitatio is uable to receive distributios o its claim, uless the distributio is provided for uder the rehabilitatio pla adopted at the meetig of iterested parties ad thereafter approved by the court. Submissio of the draft rehabilitatio pla The corporate rehabilitatio pla will outlie all modificatios of the rights of creditors or shareholders, ad also provide for ay trasfer or lease of the debtor s busiess or property ad ay other matter ecessary for the debtor s rehabilitatio. A guide to Asia Pacific restructurig ad isolvecy procedures 77

78 Restructurig of a compay s debts may ivolve substatially reducig the pricipal owig ad/or (i some cases completely exemptig) iterest paymets. The court will order the receiver to submit a draft rehabilitatio pla. Other iterested parties, however, may also prepare ad submit a draft rehabilitatio pla to the court withi the specified date. This icludes the debtor, secured creditors, usecured creditors, ad shareholders. There have recetly bee istaces where the creditor group of a debtor has prepared its ow versio of the draft rehabilitatio pla ad submitted it to the court. It is also theoretically possible to submit a pre-packaged rehabilitatio pla whe applyig for rehabilitatio proceedigs. This is rather ucommo, however, as it assumes cosesus amog the may classes of creditors. From a legal stadpoit, a majority of the total creditors must coset to submissio of the pre-packaged pla. If the pla is filed, the etire process up util the approval of the rehabilitatio pla ca be reduced by up to two moths. Iterested parties meetigs The rehabilitatio pla is formally determied ad approved over the course of three or more statutory meetigs of iterested parties. The first meetig is coveed maily to preset the receiver s report ad to provide the iterested parties with a opportuity to express their opiio o the admiistratio policy of the debtor. After the first stakeholders meetig, the court will order the receiver to submit a draft rehabilitatio pla. The secod meetig is held for the purpose of deliberatig o the draft rehabilitatio pla, which the receiver must prepare ad file (i cojuctio with the debtor s major fiacial istitutioal creditors) withi four moths from the expiratio date of the claims filig period. The third meetig is coveed to vote o a resolutio for approval of the draft rehabilitatio pla. I the absece of special circumstaces, the court ofte holds the secod ad third meetigs o the same date. The draft rehabilitatio pla is subject to approval by the requisite amout (rather tha umber) of each class of shareholders ad secured ad usecured pre-rehabilitatio creditors. The shareholders, however, have votig rights oly whe the total value of the assets of the debtor exceed the total value of the debts. The votig requiremet for the adoptio of a rehabilitatio pla by the iterested parties is approval by creditors costitutig three-quarters of the secured pre-rehabilitatio claims, two-thirds of usecured pre-rehabilitatio claims, ad a majority vote of the shareholders preset at the meetig. Creditors belogig to the same class will vote together. To the extet that the value of the secured assets is isufficiet to satisfy the repaymet of claims, the excess amout of loa or debt claim over the value of the secured assets will be treated as a usecured claim. The value of the secured assets will be determied by the examier after the commecemet of the rehabilitatio proceedigs. Court approval of the rehabilitatio pla Oce the iterested parties have approved a draft rehabilitatio pla, it will be submitted to the court for approval. I makig its determiatio, the court will aalyse whether the pla meets all of the legal requiremets uder the DRBA ad is fair to the 78 A guide to Asia Pacific restructurig ad isolvecy procedures

79 iterested parties. The court s decisio i the majority of cases will be made o the date of the third meetig of iterested parties, although the procedure may sometimes last util approximately oe week after the third meetig of iterested parties. The rehabilitatio pla takes immediate effect o court approval. Eve where the iterested parties have ot approved the rehabilitatio pla, the court at its discretio may order a cram dow ad adopt the rehabilitatio pla over the objectio of some creditor classes. Subordiatio of claims The DRBA provides a exceptio to the geeral rule that a group of creditors belogig to the same class must be treated equally. This applies to a rehabilitatio pla where the trasactios ivolve specially related persos; amely where a loa is made by or guaratee is provided by the debtor to a perso with whom it has a special relatioship, or where a guaratee is provided by that perso to the debtor itself. The Eforcemet Decree to the DRBA provides that if the debtor is a corporate etity, its specially related persos iclude: (a) its officers; (b) its affiliated compaies (icludig the associated officers) as defied uder the Moopoly Regulatio ad Fair Trade Act ( MRFTA ); (c) certai prescribed idividuals; ad (d) ay compay i which the prescribed idividual, aloe or together with the compaies ad/or idividuals referred to i (a), (b) ad (c) above, holds at least a 30% equity share, or cotrols the maagemet, for istace, through the appoitmet of officers. Prescribed idividuals iclude persos who, aloe or together with their relatives ad/or the compaies officers, ow 30% or more shares i the debtor. It also exteds to these idividuals family members, ad the appoited officers of compaies (other tha directly affiliated compaies) that fall uder the idividual s cotrol. Uder the MRFTA, a subsidiary will be deemed as a affiliated compay of the paret if, aloe or together with its related persos, it has: (a) 30% or more shares i its subsidiary; (b) the power to elect a represetative director or appoit at least 50% of the board members; ad (c) ifluece over major maagemet or operatioal matters of its subsidiary, such as chagig the corporate structure or makig ew ivestmets. Bakruptcy Proceedigs Bakruptcy is related to the liquidatio of a isolvet compay. A applicatio for bakruptcy may be made either by the debtor or its creditors. For a creditor to apply, it must prove the existece of a claim agaist the debtor with supportig evidece. Ulike rehabilitatio, which looks to the goig cocer value of the debtor, the preset value of the debtor s assets is the most relevat factor i the court s decisio whether to adjudicate the A guide to Asia Pacific restructurig ad isolvecy procedures 79

80 debtor bakrupt. I bakruptcy, the majority of the debtor s assets are trasferred to the bakrupt estate, ad ay proceeds are distributed to the creditors i accordace with the priority of the claim. Oce bakruptcy proceedigs have bee commeced, creditors must report their claims to the bakruptcy court, ad their recovery is limited to the proceeds from the sale of the assets of the bakrupt corporatio. Priority of Claims Creditors claims geerally rak as follows: Separatio claims represetig pre-bakruptcy security iterests A creditor with a secured claim, such as a lie, pledge or mortgage, or a lessee of real property with a perfected security right, may exercise its rights outside bakruptcy. Furthermore, a lessee of residetial or commercial property with a perfected right to the security deposit, where such security deposit is below the legal threshold, holds a preferetial right of paymet over other holders of a separatio claim up to the amout of the security deposit. If the proceeds from the eforcemet of the collateral are isufficiet to satisfy the secured creditor s claim, it may claim the remaider as a usecured creditor i the bakruptcy proceedigs. Commo beefit claim A commo beefit claim covers admiistrative expeses that serve the commo beefit of all parties to the bakruptcy proceedigs. It geerally icludes the costs related to the maagemet, dispositio ad distributio of the bakruptcy estate ad geerally covers claims that arise after the declaratio of bakruptcy. Certai claims, however, such as tax, wages or severace claims are recogised as a commo beefit claim, regardless of whether they arise before or after the declaratio of bakruptcy, for reasos of public policy. A commo beefit claim may be paid from time to time outside the bakruptcy proceedigs wheever cash is available for distributio, ad it raks seior to a usecured bakruptcy claim. Usecured bakruptcy claim Usecured bakruptcy claims relate to evets that occur prior to the declaratio of bakruptcy that are ot secured by collateral. Such claims may be repaid durig the bakruptcy proceedigs. They comprise: (a) bakruptcy claims with preferetial rights; (b) geeral bakruptcy claims; ad (c) subordiated bakruptcy claims. Preferetial bakruptcy claims iclude, without limitatio, those prescribed i the Korea Civil Code, the Korea Commercial Code, the Isurace Act ad Mutual Savigs Bak Act, ad these claims have priority over other geeral bakruptcy claims. Subordiated bakruptcy claims are those claims prescribed i the DRBA. These iclude iterest accruig after the declaratio of bakruptcy, costs for participatio i the bakruptcy proceedigs, pealties ad fies, or claims stated to be subordiated to other claims by agreemet betwee the debtor ad the creditor. Subordiated bakruptcy claims may be repaid oly after full repaymet of other usecured bakruptcy claims. 80 A guide to Asia Pacific restructurig ad isolvecy procedures

81 Voidable trasactios Uder the DRBA, a rehabilitatio receiver or a bakruptcy admiistrator may avoid certai actios of the debtor compay which costitute a preferece. Actios subject to claw-back o the grouds of preferece iclude: (a) a act performed by the debtor with kowledge that it will harm the iterests of usecured or secured pre-rehabilitatio creditors (but it is ot subject to claw-back if the beeficiary of the act did ot have kowledge that the act caused harm to the iterests of the usecured or secured pre-rehabilitatio creditor at the time of performace of the act); (b) the provisio of security or the repaymet of debt obligatios by the debtor that cause harm to the iterests of usecured or secured pre-rehabilitatio creditors after the debtor s paymet obligatios have bee suspeded or the filig of a applicatio for commecemet of rehabilitatio proceedigs or bakruptcy proceedigs (provided that the provisio of security or the repaymet of debt obligatios is voided oly if the beeficiary of the security or repaymet was aware of either (a) the paymet suspesio or the filig of a applicatio, or (b) the fact that such act could harm ay usecured or secured pre-rehabilitatio creditor at the time of performace of such act (i coectio with the proviso, kowledge is imputed where the beeficiary is a specially related perso )); (c) the provisio of security or the repaymet of debt obligatios by the debtor where the debtor is ot uder a obligatio to provide security or repay debt obligatios (icludig where the debtor repays prior to the due date), which is performed withi 60 days before or after the debtor s paymet obligatios have bee suspeded or the filig of a applicatio for the commecemet of rehabilitatio proceedigs or bakruptcy proceedigs (provided that such act is ot voided if the creditor was ot aware of the fact that such act harms other usecured or secured pre-rehabilitatio creditors (i coectio with the proviso, kowledge is imputed i case the beeficiary is a specially related perso ad 60 days is exteded to oe year for such specially related perso )); ad (d) ay gratuitous act or act for valuable cosideratio that may be deemed idetical to a gratuitous act, which is performed by the debtor before or after six moths from the date the debtor s paymet obligatios have bee suspeded (six moths is exteded to oe year i case the beeficiary is a specially related perso ) or the filig of a applicatio for the commecemet of rehabilitatio proceedigs or bakruptcy proceedigs. Specially related persos Uder the DRBA, ulike idepedet third parties, specially related persos are presumed to have kowledge that the debtor compay has: applied for rehabilitatio or bakruptcy; ad committed actios that cause harm to creditors. Furthermore, the look back period for the provisio of collateral or release from idebtedess icreases from 60 days to 1 year (from (a) the suspesio of paymet, or (b) the filig for rehabilitatio or bakruptcy) for a specially related perso of the debtor compay. A guide to Asia Pacific restructurig ad isolvecy procedures 81

82 Out-of-court proceedigs The most commoly adopted out-of-court restructurig for corporate etities are: private workout; ad joit maagemet uder the CRPA. Private workout A private workout is geerally oly available whe there are few creditors. As a volutary process, private workouts allow for greater flexibility ad autoomy i rehabilitatig the debtor compay. It may, however, lack eforceability i compariso to court-admiistered proceedigs as some creditors may opt ot to participate i the process. I a private workout, a debt reschedulig pla is bidig oly o those creditors that idividually agree to the pla. If the debtor compay is restructured by way of private work out, ay o-participatig creditors cotiue to retai their full claim amout ad are required to be repaid i accordace with their existig cotractual terms origially etered ito with the debtor compay. Corporate Restructurig Promotio Act The CRPA was adopted to address the foregoig problem of some creditors beefitig from a private workout by ot participatig. While the debtor has the right to apply for a workout uder the CRPA, it is up to the coucil of creditor fiacial istitutios to accept such a applicatio. Uder the CRPA, all major creditor baks or the committee of creditors must belog to the coucil of creditor fiacial istitutios. The CRPA affords the coucil of creditor fiacial istitutios of a isolvecy-symptomatic compay (the 82 A guide to Asia Pacific restructurig ad isolvecy procedures Isolvecy-Symptomatic Compay ) the right to approve oe of the procedures for supervisio or moitorig of the debtor compay if it determies that such compay is i sigificat fiacial difficulties. The supervisio available uder the CRPA may be oe of (i) joit supervisio by creditor istitutios, (ii) joit supervisio by creditor baks, or (iii) supervisio by primary correspodet bak. If the primary correspodet bak distributes a otice to covee the committee of the creditors of the Isolvecy-Symptomatic Compay to commece joit supervisio by creditor istitutios, claims of the creditors may be froze for a maximum period of four moths. If creditors with votig rights correspodig to at least three-quarters of the total votig rights i the coucil coset to the proposed workout pla, the all members of the coucil (icludig disseters) will be boud by the resolutios ad the claims of such creditors may be repaid oly i accordace with the terms of the workout agreemet to be adopted by the creditors. If a creditor fiacial istitutio disseted to the resolutio to commece joit maagemet or the workout pla, ad does ot wish to be boud by the CRPA, it is etitled to demad that other members buy out its claims agaist the debtor. The remaiig cosetig creditors usually buy out, or cause the debtor to buy out, the claims held by the dissetig creditor at a price equal to the liquidatio value of the claims. If the creditors of the Isolvecy-Symptomatic Compay believe that rehabilitatio through oe of the supervisio procedures set forth above is ot feasible, they may apply to the court for commecemet of the rehabilitatio proceedigs uder the DRBA.

83 The CRPA was iitially eacted to be effective from September 2001 util the ed of 2005, but was subsequetly reitroduced i 2007 (expirig o 2010) ad agai i The CRPA is curretly scheduled to expire o 31 December 2013 ad it remais to be see whether the Korea govermet will exted the operatio of the Act. Director liability Korea law does ot impose additioal liability o directors or other officers of a debtor compay durig isolvecy. Accordig to the Korea Commercial Code, directors are geerally held liable to the compay for ay actio or iactio take by willful miscoduct or gross egligece i cotravetio of Korea law or the compay s articles of icorporatio. The oly distictio for isolvet compaies is that, uder the DRBA, the procedure for a isolvet compay to claim compesatio agaist the directors is simpler tha uder geeral Korea civil proceedigs. Guaratees Except where specifically prohibited uder the ati-trust or ay other madatory laws ad regulatios, a guaratee issued by a Korea compay is geerally recogised as a legal ad valid obligatio of the guarator. I rehabilitatio or bakruptcy, a guaratee issued by the debtor compay may be recogised as a rehabilitatio claim or a bakruptcy claim. Ay guaratee, however, issued withi six moths from the filig of a petitio for rehabilitatio by the debtor or the bak s suspesio of paymet obligatio by the debtor is regarded as a gratuitous act that ca be voided by the receiver o the grouds of preferece. The Korea Supreme Court does ot view ay reewal of a existig guaratee withi the six-moth period as a voidable preferece. New moey ledig Oce a stay order has bee issued, the debtor compay may raise additioal fiacig oly with the approval of the court. Ay fiacig raised by the debtor compay after the issuace of a stay order, or ay moey borrowed by the receiver after the iitiatio of rehabilitatio proceedigs with the approval of the court is characterised as a commo beefit claim. Commo beefit claims rak seior to both usecured rehabilitatio claims ad secured rehabilitatio claims (but do ot rak seior to the security created over ay specific asset of the debtor compay), ad may be repaid whe due with available cash. I the case that the debtor compay s assets are isufficiet to repay the etire commo beefit claim, ay ew debt is give a superpriority rakig over other commo beefit claims, ad the commo beefit claims are repaid pro rata after the ew debt has bee paid i full. It is questioable, however, whether such super-priority rakig may be give to ew debt i the case of bakruptcy proceedigs that follow rehabilitatio proceedigs. Cross border recogitio The DRBA provides a system for the recogitio of foreig isolvecy proceedigs i Korea. I order for foreig isolvecy proceedigs to be effective, court approval must be obtaied. First, a applicatio for a support order must be filed with the Korea court ad the followig elemets must the be satisfied: (a) a applicatio i the form prescribed by the court must be submitted, alog with the relevat evidetiary documets; (b) a court-prescribed fee must be paid to the court; ad A guide to Asia Pacific restructurig ad isolvecy procedures 83

84 (c) recogitio of the foreig isolvecy proceedigs i questio must ot be cotrary to the geeral priciple of good morals ad social order of Korea. Item (c) above is the key elemet that eeds to be satisfied i order to be recogized by the Korea court. The Korea court geerally accepts a applicatio for recogitio of foreig isolvecy proceedigs uless, for istace, the priority of claims sigificatly differs from Korea law or where the creditors are deprived of procedural rights uder the relevat foreig isolvecy proceedigs. I additio to the isolvet compay s assets i foreig jurisdictios, the assets of the isolvet compay located i Korea may become part of the bakrupt estate for the beefit of all creditors. The DRBA does ot limit the applicability or effectiveess of Korea isolvecy proceedigs i foreig jurisdictios. Oce the foregoig elemets are satisfied ad the Korea court approves the foreig isolvecy proceedigs, the applicat may further apply to the court for oe or more of the followig measures: (a) suspesio of lawsuits or admiistrative procedures i respect of the isolvet compay s busiess or assets i Korea; (b) prohibitio or suspesio of ay eforcemet proceedigs, such as compulsory eforcemet, eforcemet of security, or a prelimiary attachmet or prelimiary ijuctio i respect of the isolvet compay s busiess or assets i Korea; (c) order for the prohibitio of repaymet by the isolvet compay, or a order for the prohibitio of disposal of the isolvet compay s assets i Korea; (d) appoitmet of a iteratioal isolvecy receiver/admiistrator; or (e) ay other measure ecessary for the protectio of the isolvet compay s busiess or assets or the iterest of creditors i Korea. 84 A guide to Asia Pacific restructurig ad isolvecy procedures

85 A guide to Asia Pacific restructurig ad isolvecy procedures 85

86 Malaysia 86 A guide to Asia Pacific restructurig ad isolvecy procedures

87 Malaysia Cotributed by Chooi & Compay Ms Shamala Balasudaram, Parter Level 5 Meara BRDB 285 Jala Maarof Bukit Badaraya Kuala Lumpur T: F: Key Elemets: Scheme of arragemets focus o compay rescue Receivership available for secured creditors Moratorium available at the discretio of the court Powers of maagemet ca be displaced by a provisioal liquidator or receiver Itroductio This sectio provides a geeral outlie of the mai corporate isolvecy procedures i Malaysia. The primary legislatio goverig corporate isolvecy i Malaysia is the Compaies Act 1965, the Bakruptcy Act 1967 ad the Compaies (Widig-Up) Rules The legislative framework provides for: (1) the rehabilitatio of compaies; (2) the rights of secured creditors, equity holders ad other creditors where rehabilitatio is ot possible; ad (3) sactios for officers who are guilty of itetioally cotributig to the isolvecy of a compay. Isolvecy law falls uder the civil jurisdictio of the High Court. I states ad territories where the High Court is divided ito various divisios, isolvecy matters are dealt with by commercial divisio judges. The followig isolvecy procedures are available uder the Malaysia legal system: (1) liquidatio of corporate etities; (2) private ad court-appoited receivers (ad maagers); ad (3) court approved schemes of arragemet. Liquidatio Uder the Compaies Act 1965, there are two types of liquidatio volutary ad compulsory. Volutary liquidatio Volutary Liquidatio is divided ito two types: (1) members volutary widig-up; ad (2) creditors volutary widig-up. A members volutary widig-up requires a declaratio of solvecy by the directors statig that the compay is able to pay its debts i full withi a period ot exceedig 12 moths after commecemet of the widig-up. Where this is ot possible, volutary liquidatio may oly proceed by way of the creditors volutary widig-up process. Members volutary widig-up A solvet liquidatio requires a declaratio of solvecy by the directors, followed by the passig of a special resolutio to wid-up the compay ad to appoit a liquidator. Upo the liquidator s appoitmet, the trasfer of shares or alteratio i the status of members is void, the directors powers of maagemet cease, ad busiess is discotiued uless the liquidator is of the view that cotiuig the busiess would be beeficial. This optio is oly available if the compay is still solvet ad proceeds from the widig-up ca satisfy all outstadig debts. If the compay is foud to be isolvet, the A guide to Asia Pacific restructurig ad isolvecy procedures 87

88 liquidator must take steps to chage the mode of widig-up to a creditors volutary widig-up. Creditors volutary widig-up Where a compay is isolvet ad a declaratio of solvecy is ot possible, the directors of a compay may choose to iitiate the creditors volutary widig-up process to liquidate the compay. This requires the passig of a special resolutio by the compay s members to wid-up the compay, followed by a special creditors meetig to formally appoit the liquidator. As i the case of a members volutary widig-up, upo the liquidator s appoitmet, the trasfer of shares or alteratio i the status of members is void, the powers of maagemet cease ad the busiess is discotiued. Compulsory liquidatio A court may order the widig-up of a compay i a umber of circumstaces, although the most commo groud is where the compay is uable to pay its debts. The compay is presumed isolvet whe it fails to pay a creditor after the service of a statutory demad. The aim of this process is to liquidate the busiess i a orderly maer, ad to distribute the proceeds to the creditors (ad i the evet of a surplus, to the members). Oce a widig-up order has bee grated, the Court appoits a liquidator ad the directors powers of maagemet cease. Ay dispositio of property, trasfer of shares or alteratio i the status of members made after commecemet of the widig-up is void uless the court orders otherwise. Widig-up proceedigs are commeced by the presetatio of a widig-up petitio to the court, which is the served o the 88 A guide to Asia Pacific restructurig ad isolvecy procedures compay. The compulsory widig-up process may be iitiated by a creditor, the compay, cotributory member or other specified persos.the widig-up petitio ad the date for the hearig must be advertised i at least two atioal ewspapers. All creditors may appear at the hearig to support or oppose the petitio provided a Notice of Itetio to Appear has bee filed. Oce the widig-up order has bee obtaied, a liquidator will be appoited to oversee the liquidatio process to esure the orderly realisatio of assets ad distributio of proceeds to creditors ad, where there is a surplus, members. Iability of a compay to pay its debts A compay is deemed uable to pay its debts if: (a) a creditor, to whom the compay is idebted i a sum exceedig MYR500 the due, has served o the compay a writte demad (kow as a statutory demad) requirig the compay to pay the sum due, ad the compay has for three weeks eglected to pay the sum or to secure or compoud for it to the reasoable satisfactio of the creditor; or (b) a judgmet agaist the compay is usatisfied; or (c) it is proved to the satisfactio of the court that the compay is uable to pay its debts as they fall due. I order to obtai a widig-up order it may ot be ecessary for a creditor to have served a statutory demad o the compay or to have a usatisfied judgmet debt, if it has other evidece to demostrate that the compay is isolvet. Provisioal liquidatio At ay time after a widig-up petitio has bee preseted to court ad before a widig-up order has bee made, a applicatio may be made by ay creditor, cotributory (member)

89 or by the compay itself for the appoitmet of a provisioal liquidator where the compay s property is i dager or where it is alleged the compay s maagemet is misappropriatig or wastig the compay s assets. Duties ad powers of the liquidator The liquidator i a compulsory liquidatio is subject to the supervisio of the Official Receiver, or where the Official Receiver is the liquidator, the relevat miister. He or she is accoutable to the creditors for the coduct of the liquidatio ad remais so accoutable util his or her release as liquidator. The fuctios of a liquidator i a compulsory liquidatio are to esure that the compay s assets are realised ad the proceeds distributed to the compay s creditors ad, where there is a surplus, members. The liquidator or the provisioal liquidator (as the case may be) takes ito his or her custody, or ito his or her cotrol, all the property to which the compay is or appears to be etitled. The liquidator has very broad powers, some of which may oly be exercised with the sactio either of the court or of the committee of ispectio. However, the liquidator oly has limited power to carry o the busiess (to the extet ecessary to collect ad realise the assets) ad i practice it is relatively uusual for a liquidator to achieve a sale of the busiess as a goig cocer. Powers of the compay s maagemet The powers of a compay s maagemet are displaced upo the appoitmet of a provisioal liquidator or a liquidator appoited by the court i widig-up proceedigs. Iterests of members Iterests of members are geerally uaffected by the isolvecy procedures, although i such circumstaces there is likely to be little value i their shareholdigs. The legislative framework, however, restricts members rights to dispose of the compay s property, trasfer shares or to prefer the paymet of oe creditor over aother oce a widig-up has commeced. Cotracts to which the compay is a party Cotracts do ot automatically termiate whe a widig-up order is made. The liquidator ca, however, disclaim uprofitable cotracts withi 12 moths after the commecemet of widig-up or ay such exteded period allowed by the court. The remedies of specific performace ad damages for breach of cotract remai available to a cotractig party eve after a liquidator has bee appoited. Legal proceedigs to which the compay is party At ay time after a widig-up petitio has bee preseted to the court ad before a widig-up order has bee made, the compay or ay creditor or cotributory (member) may apply to the court to stay or restrai pedig legal proceedigs agaist the compay. Oce a widig-up order has bee made, or a provisioal liquidator has bee appoited pedig the widig-up order, proceedigs may ot be commeced or cotiued agaist the compay except with leave of the court. At this poit, creditors will geerally cease their court proceedigs ad file their proofs of debt directly with the liquidator. However, a secured creditor remais free to eforce its security durig this period. Creditors claims The followig types of creditor claims are admissible uder Malaysia law for paymet durig the course of liquidatio: uliquidated damages for breach of cotract ad breach of trust; A guide to Asia Pacific restructurig ad isolvecy procedures 89

90 all debts ad liabilities (other tha uliquidated claims ot metioed above) whether preset or future, certai or cotiget (ad a estimated value shall be placed o all debts that do ot bear a certai value); ad without derogatig from the above, salary, wages, ret, iterest ad liquidated damages. The creditor claims eed to be substatiated by lodgig a proof of debt with the liquidator for approval. I the evet the liquidator rejects the claims, the creditor may appeal to the High Court agaist such rejectio. I respect of secured creditors, a proof of debt may be lodged with the liquidator for the usecured balace of their claims. Ay claims disputed by the liquidator may be adjudicated by the High Court. Receivership Private receiver Uder the terms of a debeture, a secured creditor is geerally etitled to appoit a receiver i the evet of a default by the borrowig compay. The receiver is empowered to take possessio of the assets subject to the charge i the debeture istrumet, ad he or she may opt to dispose of those assets by private sale or seek expressios of iterest by way of advertisemets i the major ewspapers. Special cosideratios arise i relatio to lad. If there is a statutory charge o the lad, the chargee may istitute foreclosure proceedigs i the High Court pursuat to the Natioal Lad Code 1965 to obtai a order for sale. Alteratively, the leder may appoit a receiver ad maager (where provisio has bee made for his or her appoitmet i the security agreemet) who may the either sell the lad by private treaty or commece foreclosure proceedigs. The optio to sell by private treaty is ot available oce a order for sale is obtaied i foreclosure proceedigs. Oce a order for sale has bee obtaied, the charged lad must be sold by public auctio. Most debetures also provide for the receiver to be appoited as both the receiver ad maager of the compay, i which case the directors powers to maage the compay are suspeded upo appoitmet. Whe a compay i receivership is placed ito liquidatio, the receiver ad maager will lose his or her power as maager/aget of the compay to the liquidator, but will retai possessory rights over ay charged assets durig the period of liquidatio. Court-appoited receiver Where there is o express cotractual power to appoit a receiver, a court-appoited receiver may be sought to preserve assets thought to be i jeopardy. The powers of a court-appoited receiver are set out i his or her appoitmet order. A court appoited receiver must be idepedet, ad has a obligatio to balace the iterests of all parties cocered, icludig those of the compay ad the compay s creditors. A receiver appoited by a debeture holder owes his or her primary duty to their appoiter ad must esure that the iterests ad returs of the debeture holder are protected. The process of appoitig a court-appoited receiver is iitiated by a applicatio by a member or creditor of the compay by summos to the court. 90 A guide to Asia Pacific restructurig ad isolvecy procedures

91 Cotracts to which the compay is a party A privately appoited receiver may choose to adopt cotracts to which the compay is a party. Eve after a receiver is appoited, the remedies of specific performace ad damages for breach of cotract remai available to a cotractig party. It should be oted, however, that i a receivership, specific performace requirig paymet of fuds by the receiver is ot permitted. Legal proceedigs to which the compay is a party The cotiuatio or commecemet of legal proceedigs agaist the compay is ot affected by the appoitmet of a private or court-appoited receiver. Court approved schemes of arragemet Schemes of arragemet are used as a method of formal corporate rescue. Schemes require approval by 75% i value ad a simple majority i umber of each class of creditors or members preset ad votig, as well as the subsequet sactio of the High Court. Secured creditors are geerally categorised ito their ow class or classes. A scheme of arragemet is iitiated by filig a origiatig summos seekig the court s leave to call ad covee meetigs of classes of creditors ad members of the compay to cosider ad vote o a scheme of compromise ad arragemet. Thereafter, otices of class meetigs are to be set to the compay s creditors ad members. The compay s icumbet maagemet retais its powers for the duratio of the scheme proceedigs. Oce the origiatig summos seekig leave has bee filed, the compay or ay member or creditor ca apply to the High Court seekig a stay order to restrai ay further proceedigs agaist the compay util the court makes a determiatio o the scheme. A stay order will typically preclude the appoitmet of a receiver ad maager uder a debeture as well as the eforcemet of security. If the scheme is approved, all creditors subject to the scheme are boud ad must comply with its terms. Challeges to atecedet trasactios I some circumstaces, the trasfer, mortgage, delivery of goods, paymet, executio or other act relatig to compay s property may, if made withi the six moths prior to the presetatio of a widig-up petitio or the passig of a resolutio to volutarily wid-up the compay, costitute a fraudulet preferece ad be clawed back by a liquidator. Similarly, where ay property, busiess or udertakig has bee acquired at a overvalue or sold at a udervalue to a related party of the compay, withi a period of two years before the commecemet of the widig-up of the compay, the liquidator may recover the differece betwee the cosideratio paid ad the value of the property, busiess or udertakig. I additio, disposals of the compay s assets subsequet to the presetatio of a widig-up petitio are void without the sactio of the court. Persoal liability for directors Directors are geerally ot held persoally liable for the debts of the compay. If durig the course of liquidatio, however, it appears the busiess of the compay has bee carried out with itet to defraud creditors or for a fraudulet purpose, a court may hold ay perso kowigly a party to such coduct persoally liable without ay limitatio of liability for all or ay of the debts or other liabilities of the compay. A applicatio may A guide to Asia Pacific restructurig ad isolvecy procedures 91

92 be made by a liquidator, creditor or cotributory (member) to the court seekig a order that the offedig perso be held persoally liable for such debts. I additio to persoal liability, crimial sactios agaist such coduct iclude a pealty of three years, imprisomet or MYR10,000. A officer of the compay who kowigly icurs a debt with o reasoable grouds of expectig that the compay would be able to repay is crimially liable to imprisomet for oe year or MYR5,000. The court may also iquire ito the coduct of the compay s officers ad order the officers to make restitutio or pay damages where they misapply or wrogfully retai the compay s property, or are otherwise guilty of ay misfeasace or breach of duty. Guaratees give by a compay which subsequetly goes ito liquidatio, whether grated i favour of its paret, a subsidiary or siblig compay, will geerally remai valid. Priority I Malaysia, the order of priority for the distributio of proceeds to creditors is prescribed by the Compaies Act Secured creditors are paid out of the proceeds from the realisatio of secured assets. If the proceeds are isufficiet to discharge the secured obligatios i full, the portio remaiig outstadig raks as a usecured debt. I the cotext of receivership, proceeds from the realisatio of charged assets are distributed i the followig order of priority. Leder liability I geeral, the risk of a leder beig held liable to pay its customer s debts is small. Guaratees A guaratee is a secodary obligatio by a third party relatig to a primary obligatio by a cotractig party (i.e. a borrower uder a loa agreemet). If the primary obligatio is altered, discharged or fails, the guaratee may ot be eforceable. Guaratees are available i most circumstaces, for example dowstream, upstream or cross-stream guaratees. Corporate beefit issues eed to be addressed especially i the cotext of upstream ad cross-stream guaratees. Guaratees may be challeged ad set aside if they amout to a ufair preferece trasactio. the costs ad expeses of realisig the property; the costs ad expeses of the receivership, icludig the remueratio of the receiver, ad the costs ad remueratio of the trustee for the debeture holders (if ay); the costs of the plaitiff i a debeture holder s actio; the claims of sectio 191 preferetial creditors (which comprise wages, accrued leave, superauatio etitlemets, Employees Providet Fud ( EPF ) ad ay loas that directly relate to the paymet of these claims) if the debetures are secured by a floatig charge; ay sums due to the debeture holders i respect of pricipal ad iterest; the federal taxes. 92 A guide to Asia Pacific restructurig ad isolvecy procedures

93 Claims i liquidatio (without defermet of a floatig charge) rak as follows: cost ad expeses of widig-up, icludig costs of the petitioer ad remueratio of the liquidator; wages ad salaries ot exceedig MYR1,500 for services redered withi the four moths prior to the commecemet of widig-up; worker s compesatio which accrued prior to the commecemet of widig-up; remueratio payable for vacatio leave which accrued prior to the commecemet of widig-up; EPF cotributios for the 12 moths prior to the commecemet of widig-up; federal taxes; the usecured creditors. Claims i liquidatio (ivolvig a defermet of a floatig charge) rak as follows: cost ad expeses of widig-up; wages ad salaries ot exceedig MYR1,500 for services redered withi four moths prior to the commecemet of widig-up; remueratio payable for leave which accrued prior to the commecemet of widig-up; ay floatig charges; worker s compesatio which accrued prior to the commecemet of widig-up; federal taxes; the usecured creditors. New moey ledig New moies provided by leders durig the rehabilitatio procedure do ot give rise to ay priority i terms of repaymet uless such priority forms part of the scheme of arragemet duly sactioed by the court. Recogitio of foreig isolvecy proceedigs The courts of Malaysia geerally recogise foreig isolvecy proceedigs commeced i foreig jurisdictios i accordace with the rules of private iteratioal law as they apply i Malaysia. A foreig liquidator of a foreig compay placed ito liquidatio i its place of icorporatio is recogised as havig the powers ad fuctios of a local liquidator. The High Court may, however, appoit a local liquidator to realise or dispose of the assets of a foreig compay located i Malaysia. I both circumstaces, ay proceeds arisig from the sale of the assets located i Malaysia will be distributed to the foreig liquidator oly after dischargig the foreig compay s outstadig debts ad liabilities icurred i Malaysia. EPF cotributios for the 12 moths prior to the commecemet of widig-up; A guide to Asia Pacific restructurig ad isolvecy procedures 93

94 Claims by foreig creditors are ot subject to ay special or additioal requiremets to be proved i isolvecy. However, uder the Exchage Cotrol Act 1953, the approval of the Cotroller of Exchage Cotrol (i.e. Bak Negara Malaysia) is required to repatriate ay amouts recovered. I practice, the Bak Negara Malaysia will usually grat such approval. Foreig isolvecy admiistrators are etitled to claim, take cotrol of, ad realise or deal with the property of a foreig compay situated withi Malaysia if the exercise of such powers is authorised by the law of the coutry where the foreig compay is icorporated. 94 A guide to Asia Pacific restructurig ad isolvecy procedures

95 A guide to Asia Pacific restructurig ad isolvecy procedures 95

96 The Philippies 96 A guide to Asia Pacific restructurig ad isolvecy procedures

97 The Philippies Cotributed by Belo Gozo Elma Parel Asucio Lucila Mr Roberto Rafael V. Lucila, Seior Parter 15th ad 16th Floor, Sagittarius Codomiium H. V. Dela Costa Street, Salcedo Village Makati City 1227 Philippies T: F: , Key Elemets: Rehabilitatio focuses o compay rescue. Moratorium available has ability to restrict secured creditors. Itroductio This sectio is desiged to provide a geeral outlie of the mai corporate isolvecy procedures available i the Philippies. The isolvecy regime i the Philippies was recetly revised, with the Fiacial Rehabilitatio ad Isolvecy Act of 2010 ( FRIA ) takig effect from September It replaces the Isolvecy Law of The aim of the FRIA is to esure the effective ad efficiet rehabilitatio or liquidatio of compaies i a maer that guaratees certaity ad predictability i commercial affairs, preserves the value of the assets of compaies ad recogises creditor rights ad claims. There are also bespoke isolvecy regimes for certai other types of compaies/etities, such as baks, isurace compaies, as well as atioal ad local govermet agecies ad uits (although govermet fiacial istitutios icludig govermet owed ad cotrolled corporatios are subject to the FRIA). These are expressly excluded from the operatio of the FRIA, ad are beyod the scope of this ote. There are two pricipal isolvecy procedures i the Philippies, amely: (1) rehabilitatio; ad (2) liquidatio. Uder the regime s trasitioal arragemets, the FRIA will apply to all proceedigs commeced after September 2010 i relatio to ay pedig rehabilitatio or liquidatio procedures which were iitiated uder the previous regime. The previous regime will cotiue to apply however where, i the opiio of the court, the applicatio of the FRIA would ot be feasible or would give rise to a ijustice. Rehabilitatio Rehabilitatio is pricipally a procedure iteded to rescue compaies which are or may become isolvet. The procedure is oly available where it is show that creditors will recover more if the compay cotiues as a goig cocer tha if it were immediately liquidated. Three rehabilitatio processes exist uder the FRIA, amely: (1) court-supervised rehabilitatio; (2) pre-egotiated rehabilitatio; ad (3) a out-of-court iformal restructurig agreemet or rehabilitatio pla. Court-supervised rehabilitatio There are two types of court-supervised rehabilitatio procedures, amely volutary rehabilitatio ad ivolutary rehabilitatio. I a volutary rehabilitatio, the compay files a petitio for rehabilitatio with the court. The process is iitiated by a majority vote of the board of directors or trustees ad is subsequetly authorised by a vote of the stockholders represetig at least two-thirds of the outstadig capital stock A guide to Asia Pacific restructurig ad isolvecy procedures 97

98 or, i the case of a o-stock corporatio, by a vote of at least two-thirds of the members. I a ivolutary rehabilitatio, the creditors of the compay iitiate the proceedigs by filig a petitio with the court. This is oly available, however, to creditors with a aggregate claim of the higher of PHP1,000,000 or at least 25% of the subscribed capital stock. I additio: (a) there must be o geuie issue i fact or law i respect of the claim, ad the claim must be due ad/or demadable ad o paymets must have bee received for at least 60 days; (b) the compay must have failed geerally to meet its liabilities as they fall due; or (c) a creditor, other tha the petitioer, must have iitiated foreclosure proceedigs agaist the compay that will prevet the compay from payig its debts as they fall due. Effect of court-supervised rehabilitatio Where the court is satisfied of the viability of the compay s rehabilitatio, it will issue a Commecemet Order that appoits a rehabilitatio receiver. A copy of the Commecemet Order must be published i a ewspaper of geeral circulatio ad for a volutary rehabilitatio, requires a copy of the petitio be delivered to the compay s creditors. The Commecemet Order prohibits the compay s suppliers from withholdig the goods or services where the compay makes paymet for goods ad services after the date of the order, creates a moratorium durig which o isolvecy proceedigs or other legal proceedigs, icludig eforcemet of security, ca be take without the permissio of the court 98 A guide to Asia Pacific restructurig ad isolvecy procedures (although pedig proceedigs may be cotiued), ad reders void the exercise of set-off rights by ay of the compay s creditors. The Commecemet Order also prohibits the use of self-help remedies i relatio to the seizure or sale of the compay s property, prohibits the compay from sellig, ecumberig, trasferrig or disposig i ay maer ay of its property except i the ordiary course of busiess, ad prohibits the compay from makig ay paymet of its liabilities outstadig as of the commecemet date. Maagemet of the compay remais with the existig directors. However all powers i relatio to paymets or the sale, disposal, assigmet, trasfer or ecumbrace of property require approval of the rehabilitatio receiver ad/or court. All cotracts of the compay with creditors ad other third-parties cotiue provided the compay cofirms the cotracts withi 90 days followig the commecemet of proceedigs. Cotractual obligatios arisig or performed durig this electio period or after the cotracts have bee cofirmed are ot subject to the moratorium ad are to be paid whe they fall due. Cotracts ot cofirmed withi the required deadlie are termiated ad ay resultig claims become subject to the moratorium. Powers of the rehabilitatio receiver The primary duties of the rehabilitatio receiver are to preserve ad maximize the value of the compay s assets, determie the viability of the rehabilitatio process, prepare ad submit a rehabilitatio pla to the court ad implemet the rehabilitatio pla oce approved.

99 The rehabilitatio receiver has power to take custody or cotrol of the compay s property to preserve its value, recover all amouts owig to the compay, recover ay fraudulet paymets made by the compay or paymets which costitute udue prefereces of its creditors, ad to moitor the operatios ad busiess of the compay. Importatly, the rehabilitatio receiver has o power to assume cotrol of the compay or to sell the property of the compay uless the court orders otherwise. The rehabilitatio receiver may apply to the court for authorisatio to sell the compay s uecumbered property outside its ordiary course of busiess where it ca show that the property is perishable, costly to maitai, susceptible to devaluatio or otherwise i jeopardy. Similarly, the rehabilitatio receiver may apply to the court for authorisatio to dispose of the compay s ecumbered property or property of others held by the compay where: (a) the rehabilitatio receiver obtais the coset of the secured creditor or property owers; (b) the court determies the disposal is ecessary for the cotiued operatio of the compay s busiess; ad (c) the compay provides a substitute lie or owership right that provides a equal level of security for the couterparty s claim or right. Where the compay s property is i dager or where it is alleged that those i cotrol of the compay are misappropriatig or wastig the compay s assets, a applicatio may be made by ay iterested party to the court for a rehabilitatio receiver or maagemet committee to assume cotrol of the compay. Iitial hearig Withi 40 days of the iitial hearig, the rehabilitatio receiver must submit a report to the court icludig his or her prelimiary fidigs ad recommedatios. If the court fids that the compay is isolvet ad there is a substatial likelihood of the compay beig successfully rehabilitated, it will make a order upholdig the rehabilitatio petitio ad direct the rehabilitatio receiver to cosult with the compay ad its creditors ad revise or recommed actio o the Rehabilitatio Pla. If the court fids that the compay is isolvet but rehabilitatio is ulikely, it will place the compay ito liquidatio. Fially, the court may dismiss the petitio where it fids that: (a) the compay is ot isolvet; (b) the petitio is a sham iteded oly to delay the eforcemet of the rights of the creditors; (c) the petitio cotais materially false or misleadig statemets; or (d) the compay has defrauded its creditors. If the petitio is dismissed, the court may, i its discretio, order the petitioer to pay damages to ay creditor or to the compay ijured as a result of the filig of the petitio. Rehabilitatio pla Oce the rehabilitatio receiver fialises the Rehabilitatio Pla, he or she will put it to the compay s creditors for approval. The rehabilitatio pla is oly approved where it is passed by all classes of creditors (secured or usecured) whose rights are adversely modified or affected by the pla. This requires creditors holdig more tha 50% of the total claims i each class to vote i A guide to Asia Pacific restructurig ad isolvecy procedures 99

100 favour of the pla. Oce approved, the court is the required to cofirm the pla, at which poit the pla becomes bidig o the compay ad all classes of creditors. Rehabilitatio plas may oly be cofirmed by the court if it meets certai statutory requiremets. Importatly, rehabilitatio plas must maitai the security iterest of the secured creditors ad preserve the liquidatio value of their security. The moratorium cotiues except i relatio to claims arisig after approval of the pla. The court may cofirm a rehabilitatio pla i the absece of creditor approval where it is of the opiio that the compay s creditors would receive greater compesatio tha if the compay were placed ito liquidatio. Termiatig the rehabilitatio pla Ay stakeholder or the rehabilitatio receiver may apply to the court seekig termiatio of the rehabilitatio proceedigs. If the court fids the implemetatio of the Rehabilitatio Pla has bee successful, it will termiate the proceedigs liftig ay moratorium or other court orders. If, however, the court fids the implemetatio of the Rehabilitatio Pla has failed, it will place the compay ito liquidatio. Secured creditors Secured creditors are also subject to the moratorium, however may apply to the court for orders to preserve their security if they ca show they do ot have adequate protectio over the property securig their claim (for example, where isurace lapses) or to eforce their security where the property is ot required for the rehabilitatio of the compay. The rehabilitatio procedure is ot iteded to dimiish the value of security or rights of a secured creditor, except isofar as it suspeds the right to eforce durig the moratorium period. Rehabilitatio plas may oly be cofirmed by the court if they maitai the security iterest of the secured creditors ad preserve the liquidatio value of their security. Pre-egotiated rehabilitatio This proceedig is iitiated either by the compay or the compay joitly with ay of its creditors. A petitio for a rehabilitatio pla may be filed for approval by creditors holdig at least two-thirds of the total liabilities of the compay. This must iclude creditors holdig at least 50% of the total secured claims, ad creditors holdig at least 50% of the usecured claims. If the petitio is satisfactory i form ad substace, the court must grat a order requirig a copy of the order be distributed to the compay s creditors ad published i a ewspaper of geeral circulatio, appoit a rehabilitatio receiver (if provided for i the pla) ad provide for a moratorium o eforcemet. The court must approve the pre-egotiated pla uless a creditor or other iterested party submits a objectio. If the court determies that either the compay or the creditors who support the Rehabilitatio Pla acted i bad faith, or that the objectio is o-curable, the court may place the compay ito liquidatio. A fidig by the court that the objectio has o substatial merit or that the objectio has bee cured will be deemed to be a approval of the Rehabilitatio Pla. Similarly, the court has a period of 120 days from the date of filig the petitio to approve the Rehabilitatio Pla, after which time the Rehabilitatio Pla is automatically approved. 100 A guide to Asia Pacific restructurig ad isolvecy procedures

101 Out-of-Court Iformal Restructurig Agreemets or Rehabilitatio Plas The FRIA recogises out-of-court restructurig agreemets ad Rehabilitatio Plas which have the same legal effect as a pla sactioed by the court, provided: it is agreed to by the compay; ad approved by the creditors holdig at least 85% of the total liabilities of the compay, which must iclude the creditors represetig at least 67% of the secured obligatios, ad those represetig at least 75% of the usecured obligatios of the compay. Such plas require publicatio for at least three cosecutive weeks i a ewspaper of geeral circulatio i the Philippies. The Rehabilitatio Pla or restructurig agreemet takes effect after 15 days have elapsed from the date of the last publicatio of the otice. Liquidatio The liquidatio of a isolvet compay is iteded to provide for the widig up of the compay ad the equitable distributio of the compay s assets. There are two forms of liquidatio, amely: (1) ivolutary liquidatio (sometimes called compulsory widig up); ad (2) volutary liquidatio. At ay time durig the course of the court-supervised or pre-egotiated rehabilitatio proceedigs, the compay or its creditors may apply to the court to place the compay ito liquidatio. Similarly, the court of its ow volitio may place the compay ito liquidatio durig the course of court-supervised or pre-egotiated rehabilitatio proceedigs, or followig a recommedatio by the rehabilitatio receiver who has formed the view that rehabilitatio of the compay is ot feasible. Volutary liquidatio is iitiated by the compay ad requires a petitio establishig its isolvecy. Ivolutary liquidatio is iitiated by at least three creditors with a aggregate claim that is equal to or exceeds PHP1,000,000 or 25% of the subscribed capital stock of the compay. I additio, the qualified creditors must show: (a) there is o geuie issue i fact or law i relatio to the claims of the petitioers; (b) the claim is due ad/or demadable ad o paymets have bee received for at least 180 days, or that the compay has failed geerally to meet its liabilities as they fall due; ad (c) there is o substatial likelihood that the compay may be rehabilitated. Effect of a liquidatio order I both a volutary ad ivolutary liquidatio, the court must issue a liquidatio order if the petitio is satisfactory i form ad substace. The liquidatio order will deem the compay dissolved ad its corporate existece termiated. Legal title ad cotrol of all the compay s assets, except those exempt from executio, will vest i the liquidator or, pedig his or her electio or appoitmet, with the court. The liquidatio order will also direct all paymets ad ay claims or coveyace of property due to the compay be made to the liquidator, prohibit paymets or the trasfer of ay property by the compay, authorise the paymet of admiistrative expeses as they fall due, ad direct all creditors to file their claims with the liquidator. A guide to Asia Pacific restructurig ad isolvecy procedures 101

102 All cotractual obligatios of the compay will be termiated ad/or breached uless the liquidator declares otherwise ad the cotractig party agrees withi 90 days from the date of his or her assumptio of office. The order provides for a moratorium such that o separate actios for the collectio of a usecured claim will be allowed, ad those already pedig will be trasferred to the liquidator to settle or cotest. Secured creditors may eforce rights Although liquidatio has the effect of suspedig legal proceedigs agaist the compay, liquidatio does ot override the rights of secured creditors who remai free to eforce their security ad to retai the proceeds of eforcemet i priority to the claims of usecured creditors. However, o foreclosure proceedigs are permitted for a period of 180 days from the date of the liquidatio order. Geeral usecured claims are settled i the followig order: claims costitutig legal lies uder Article 2241 or 2242 of the Civil Code, followed by preferetial creditors (such as employees ad labourers of the compay as defied by Article 2244 of the Civil Code) ad, fially, usecured creditors. Powers of the liquidator The liquidator is a officer of the court ad subject at all times to the cotrol of the court. He is resposible to the creditors for the coduct of the liquidatio ad remais so resposible util his release as liquidator. The fuctios of a liquidator i a compulsory liquidatio are to esure that the compay s assets are collected i (icludig recovery of ay property frauduletly coveyed by the compay), realised ad distributed to the compay s creditors, ad to pay ay surplus to the persos etitled to it. The liquidator takes ito his custody all the property to which the compay is or appears to be etitled. The powers of the directors cease. The liquidator has very broad powers, some of which may oly be exercised with the sactio either of the court or of the liquidatio committee of creditors. Withi 3 moths from the liquidator s assumptio of office, the liquidator is required to submit a Liquidatio Pla to the court which must iclude a list of the compay s assets ad schedule for the liquidatio of those assets ad paymet of claims. Oce approved by the court, the liquidator is empowered to sell the compay s assets ad settle creditor claims. The liquidator will geerally sell the uecumbered assets of the isolvet debtor at a public auctio. However, a private sale may be allowed with the approval of the court if; (a) the goods to be sold are of a perishable ature, are likely to quickly deteriorate i value or are disproportioately expesive to keep or maitai; or (b) the private sale is i the best iterests of the compay ad its creditors. With the approval of the court, the compay s uecumbered property may also be coveyed to a creditor i satisfactio of its claim. Challeges to atecedet trasactios Ay trasactio occurrig prior to the issuace of a Liquidatio Order or a petitio for rehabilitatio proceedigs (the Commecemet Date), may be rescided or declared ull ad void where it was executed with itet to defraud the creditors or 102 A guide to Asia Pacific restructurig ad isolvecy procedures

103 where it costitutes a udue preferece of creditors. These iclude trasactios which: (a) withi 90 day period prior to the Commecemet Date, provide ureasoably iadequate cosideratio to the compay, ivolve the accelerated paymet of a claim to a creditor or provide security or additioal security; (b) ivolve creditors, where a creditor obtaied, or received the beefit of, more tha its pro rata share i the assets of the compay, executed at a time whe the compay was isolvet; or (c) are iteded to defeat, delay or hider the ability of the creditors to collect claims where the effect of the trasactio is to put assets of the compay beyod the reach of creditors or to otherwise prejudice the iterests of creditors. The rehabilitatio receiver or ay creditor with the rehabilitatio receiver s coset may iitiate a actio to rescid or declare a trasactio void. Guaratees I the Philippies, the cocepts of guaratee ad suretyship are distiguished uder the Civil Code. Pursuat to the Civil Code, the essetial characteristic of a suretyship is that primary liability falls o the surety. That liability is wholly idepedet of ay liability which may arise betwee the debtor ad the creditor. I cotrast, uder a guaratee, the guarator is uder a secodary obligatio which is depedet o the default of the debtor. Guaratees are available i most circumstaces ad may be give as credit support for future debts, the amout of which may be ukow at the time of gratig the guaratee. As a geeral priciple, the guarator caot be compelled to pay the creditor uless the creditor has first exhausted all recourse agaist the debtor. However, the parties may cotract out of this geeral priciple or it may be disapplied as a result of other exceptios cotaied i the Civil Code. I additio, the eforceability of a guaratee ca also be prejudiced as a result of certai actios take by the creditor, icludig, for example, the gratig of a extesio to the debtor without the coset of the guarator or, i the cotext of a cotract ivolvig co-guarators, the release of oe guarator without the coset of the other guarators. New moey ledig Normally leders will isist o additioal security or priority (ahead of debts icurred prior to the proceedigs) before ay ew moies are advaced to compaies after the opeig of ay isolvecy proceedigs. The compay, with the approval of the court, may eter ito ew fiace arragemets ad ecumber its property to aid i its rehabilitatio. Paymet obligatios arisig out of ay ew fiace arragemets are ot subject to the moratorium ad are to be paid whe they fall due. Persoal liability of directors Directors ad officers who willfully: (a) dispose or cause to be disposed ay property of the compay other tha i its ordiary course of busiess; (b) authorise ay trasactio i fraud of creditors or i a maer grossly disadvatageous to the compay or its creditors; or (c) embezzle or misappropriate ay property of the compay, are be liable to double the value of the trasactio ivolved or property disposed of or embezzled, whichever is higher. A guide to Asia Pacific restructurig ad isolvecy procedures 103

104 Recogitio of foreig isolvecy proceedigs The FRIA adopted the Model Law o Cross-Border Isolvecy of the Uited Natios Commissio o Iteratioal Trade Law (UNCITRAL). If there is a rehabilitatio proceedig filed by a foreig etity i aother jurisdictio, a petitio may be filed by the represetative of the foreig etity ad the court may issue order: (a) suspedig ay actio to eforce claims agaist the etity, or otherwise seize or foreclose o property of the foreig etity located i the Philippies; (b) requirig the surreder of property of the foreig etity to the foreig represetative; or (c) providig other ecessary relief. I determiig whether to grat relief to a foreig etity, the court must cosider; (a) the protectio of creditors i the Philippies, ad the icoveiece i pursuig their claim i a foreig proceedig; (b) the just treatmet of all creditors through resort to uified isolvecy or rehabilitatio proceedigs; (c) whether other jurisdictios have give recogitio to the foreig proceedig; (d) the extet to which the foreig proceedig recogises the rights of creditors ad other iterested parties i a maer substatially i accordace with the FRIA; ad (e) the extet to which the foreig proceedig has recogised ad show deferece to proceedigs uder the FRIA ad previous legislatio. 104 A guide to Asia Pacific restructurig ad isolvecy procedures

105 A guide to Asia Pacific restructurig ad isolvecy procedures 105

106 Sigapore 106 A guide to Asia Pacific restructurig ad isolvecy procedures

107 Sigapore Cotributed by Clifford Chace (Sigapore office) Key Elemets: Volutary admiistratio procedure focuses o compay rescue ad provides for a automatic moratorium Receivership available as a self help remedy for secured creditors Challeges to atecedet trasactios Itroductio This sectio provides a geeral outlie of the mai corporate isolvecy procedures i Sigapore. Most of the relevat legislatio is cotaied i the Compaies Act. The pricipal legislatio i Sigapore goverig corporate isolvecy is the Compaies Act (Chapter 50). It is supplemeted by the Compaies (Widig-Up) Rules. Certai provisios of the Bakruptcy Act (Chapter 20) also apply to corporate isolvecy i Sigapore. The isolvecy regime i Sigapore is maily categorised ito liquidatio (Part X of the Compaies Act) ad rehabilitatio (Part VII ad Part VIIA of the Compaies Act). The mai procedures ecoutered i corporate isolvecies are: (1) receivership; (2) judicial maagemet/rehabilitatio; (3) liquidatio. We also cosider very briefly schemes of arragemet, voidable trasactios, the persoal liability of directors, leder liability, guaratees, priority of security ad claims, ew moey ledig ad the recogitio of foreig isolvecy proceedigs. Tests for isolvecy There are two pricipal tests for isolvecy: the cash flow test ad the balace sheet tests. Uder the cash flow test, a compay is isolvet if it is uable to pay its debts as they fall due. Uder the balace sheet test, a compay is isolvet if its liabilities exceed its realisable assets. I Sigapore, a applicatio may be preseted to the court for a order that a compay is to be woud up compulsorily if it is uable to pay its debts. A compay is deemed to be uable to pay its debts where: (a) a sum exceedig SGD10,000 has falle due ad followig the service of a formal demad, it remais upaid for three weeks or more; (b) the executio or other process issued i relatio to a judgmet has bee usuccessful i whole or i part; (c) the court is satisfied upo cosiderig the cotiget ad prospective liabilities of the compay that it is uable to pay its debts. Receivership Receivership is regulated by Part VIII of the Compaies Act. A receiver is a perso who is appoited to collect, protect ad receive property ad icome from property. A receiver may be appoited i respect of a compay ecompassig its etire busiess ad udertakig, or i respect of a particular asset or assets of the compay. He or she may be appoited by the court or out of court by persos etitled to do so pursuat to A guide to Asia Pacific restructurig ad isolvecy procedures 107

108 cotractual arragemets (e.g. debeture holders - receivership is the typical method of eforcig a debeture i the evet of default). The court may appoit a receiver i respect of a compay where, for example: (a) the compay is icapable of maagig its ow affairs; (b) its assets are i jeopardy ad creditors eed protectio; (c) shareholders are i dispute ad it is ecessary to appoit a impartial receiver to preserve the status quo; ad (d) a receiver is ecessary i aid of executio of a judgmet. A body corporate or a udischarged bakrupt caot be appoited as a receiver. Although the court has power to appoit a receiver, it will usually ot exercise the power uless it is satisfied that there is a real cocer that the compay s assets may be i jeopardy or dissipated. The primary fuctio of a receiver is to realise the compay s assets to discharge the debt owed to the debeture holder. This is subject to payig ay preferetial creditors claims from assets secured by a floatig charge. Secured creditors will rak i priority to other creditors. A receiver appoited by the court is ot a aget of ay perso but is a officer of the court. A receiver appoited out of court may be the aget of the perso appoitig him. Uless the debeture provides otherwise, receivers appoited out of court are ot agets of the compay. A receiver s primary duty is ot to the compay but to the debeture holders who appoited him or her. However, the acts of the receiver are deemed to be the acts 108 A guide to Asia Pacific restructurig ad isolvecy procedures of the mortgagor, ad will bid the mortgagor accordigly. He may, however, owe limited fiduciary duties to the compay ad must exercise diligece ad care whe disposig of the compay s assets. A receiver is also required to esure that all correspodece of the compay states that a receiver has bee appoited ad to lodge with the Registrar of Compaies detailed accouts. I certai circumstaces, a receiver may be liable for ay debts icurred by him or her durig the course of the receivership. If a receiver is ot appoited uder a debeture, a applicatio ca be made to the court to appoit a receiver o behalf of the debeture holders or other creditors of the compay. After the debeture holder has bee paid off, the compay may cotiue to trade. However, i most cases, the compay will ot be i a positio to cotiue ad will be woud up. The office of receiver per se does ot cofer ay power to carry o the busiess of the compay. If the compay is to cotiue to trade at all, it is ecessary to appoit a receiver ad maager. I the evet of widig up, the receivership cotiues isofar as it is ot icosistet with the widig up. Judicial Maagemet Judicial maagemet is iteded to operate as a meas to rehabilitate ad/or facilitate the restructurig of troubled compaies. Uder Part VIIIA of the Compaies Act, the compay, its directors, or a creditor may apply to the court to appoit a judicial maager if the court is satisfied that the compay is uable to pay its debts ad that the grat of a

109 judicial maagemet order is likely to achieve oe or more of the followig purposes: (a) the survival of the compay or its udertakig as a goig cocer; (b) the approval of a compromise or a scheme of arragemet with the creditors; or (c) a more advatageous realisatio of the compay s assets tha i a widig up. The court may make a judicial maagemet order if it cosiders that the public iterest so requires, eve if the above purposes may ot be fulfilled. A judicial maagemet order is ulikely to be grated if creditors are able to achieve the iteded purposes of the judicial maagemet order through some other way without ay detrimet to the compay, or if the creditors would suffer irreparable loss as a result of the judicial maagemet order. If a judicial maagemet order is grated, the court will appoit a judicial maager who will maage the affairs, busiess ad property of the compay. A judicial maagemet order, uless otherwise discharged, is effective for a period of 180 days from the date of the gratig of the order. Such period may be exteded by a applicatio of the judicial maager. Uless it is i the public iterest to do so, the court may ot grat a order uless it is satisfied that the holder of a debeture secured by a floatig charge over the whole (or substatially the whole) of the compay s assets will ot oppose the makig of the order ad has ot or will ot exercise its right to appoit a receiver. Upo the makig of a applicatio for the appoitmet of a judicial maager, the court has the power to appoit a iterim judicial maager pedig the makig of a judicial maagemet order. The applicat would have to provide good reasos why such a appoitmet should be made, such as where there is a dager that the assets of the compay will be dissipated i the iterim. Oce a judicial maagemet order (or a iterim judicial maagemet order as the case may be) is made, there is a statutory moratorium prevetig legal proceedigs from beig commeced or cotiued agaist the compay subject to the judicial maager s coset or the leave of court. This icludes restrictig a secured creditor from eforcig ay of its security over the compay s property. A judicial maager acts as the aget of the compay. Accordigly, the compay will be boud by ay cotracts or trasactios the judicial maager eters, withi his or her authority, o the compay s behalf. The compay has a duty to idemify the judicial maager i respect of ay debts or liabilities uder such cotracts etered ito by the judicial maager, i priority to all other debts except those subject to certai security iterests specified i the Compaies Act. Judicial maagemet is deemed to have commeced at the time of the makig of the applicatio for judicial maagemet. The judicial maagemet order made by the Court is valid for 180 days. However, it is ope to the judicial maager to apply to A guide to Asia Pacific restructurig ad isolvecy procedures 109

110 the Court for a extesio of the judicial maagemet order ad it is a matter for the Court s discretio whether to grat the extesio. Scheme of Arragemets ad Recostructio Sectio 210 of the Compaies Act provides that where a compromise or arragemet is proposed betwee the compay ad its creditors, the court may order a meetig of creditors to cosider such compromise or arragemet. The first formal step towards obtaiig approval for a scheme of arragemet is for the compay proposig the scheme to apply to the Court for leave to covee a meetig of all or certai of its creditors to cosider ad if thought fit to approve the scheme. Oe of the key tasks ad resposibilities of the promoter of a scheme of arragemet is to cosider whether the scheme creditors should be classified differetly accordig to their separate iterests ad if so, to hold separate creditors meetigs. After leave has bee obtaied, the prospective scheme creditors will typically be requested to submit their proofs of debt alog with ay supportig documets to the chairperso of the creditors meetigs for his/her adjudicatio. The chairperso of the creditors meetigs is usually the prospective scheme maager or his/her omiee. The coduct of the creditors meetig is the secod stage of the sectio 210 process. At the creditors meetig, the approval by a majority i umber represetig 75% i value of the creditors claims must be obtaied, either votig i perso or by proxy, to approve the compromise or arragemet. Uaimous coset of the creditors is therefore ot required. Upo approval by the court, the terms of the compromise or arragemet will be bidig o all creditors, icludig secured creditors, whose rights are affected by the compromise or arragemet. However, there is othig to stop the secured creditors from realisig their secured assets or the usecured creditors from brigig actios agaist the compay while the compay is still udergoig restructurig, uless a court order is sought ad grated to restrai legal proceedigs from beig take agaist the compay oce a scheme of arragemet is proposed. After the creditors meetigs have bee coducted, the third ad fial stage is the applicatio to Court for the approval of the scheme. I determiig whether to approve the compromise or arragemet, the court must be satisfied of the followig matters:- (a) whether the statutory provisios have bee complied with (i.e. whether the creditors meetigs have bee held i accordace with the terms of the Court order gratig leave to covee the said meetigs); (b) whether those who atteded the creditors meetigs were fairly represetative of the class of creditors (or members as the case may be) ad that the statutory majority did ot coerce the miority i order to promote the iterests adverse to the those of the class whom the statutory majority purported to represet; ad (c) whether the scheme is oe that a reasoable creditor or member, beig a member of the class cocered ad actig i respect of his iterest, would approve. 110 A guide to Asia Pacific restructurig ad isolvecy procedures

111 If the Court is satisfied of the above matters, it will approve the proposed scheme of arragemet (the Sactio Order ). The scheme will become effective ad bidig o all parties upo the lodgemet of the Sactio Order with the Registrar of Compaies ad Busiesses. Both recostructios (i.e. the ratioalisatio of operatios by the trasferrig of assets ad liabilities betwee related compaies) ad mergers may be effected through a scheme of arragemet uder sectio 210. The court has the power to make orders to facilitate recostructios ad mergers i relatio to compaies icorporated i Sigapore. A foreig compay may be subject to a Sigapore scheme of arragemet if there is sufficiet exus betwee the foreig compay ad Sigapore ad a reasoable possibility that the compay s creditors will beefit from the scheme. A scheme of arragemet may be proposed by the compay, ay member, ay creditor, a judicial maager (if the compay has bee placed i judicial maagemet) or a liquidator (if the compay is beig woud up). Liquidatio - volutary widig up There are two types of volutary widig up, a members volutary widig up ad a creditors volutary widig up, the essetial differece beig that the former applies to solvet compaies ad the latter to isolvet compaies. Accordigly, volutary liquidatio is ot always a isolvecy procedure ad is ot dealt with i ay detail i this ote. Liquidatio - Creditors volutary widig up If the compay is uable to pay its debts, the compay ca covee a creditors meetig to cosider the volutary widig up of the compay. If the directors cosider that the compay caot pay its debt, they ca resolve that the compay be placed i a isolvet liquidatio. A members meetig would be held ad if the members resolve to wid up the compay, they will also appoit a liquidator, subject to ay preferece the creditors may have as to choice of liquidator. Usually, the busiess of the compay will cease to operate oce widig up commeces. Creditors are required to provide their proofs of debt o the commecemet of the widig up process. I urget cases, the board of directors ca resolve to place the compay ito liquidatio ad appoit a liquidator immediately. The decisio must later be ratified by the subsequet resolutios of the members ad creditors. The commecemet of the widig up is deemed to be at the time of passig of the resolutio to wid up. The resolutio must be filed with the Registrar of Compaies withi seve days. Other tha i urget cases, the compay must give otice of the resolutio i oe or more ewspapers circulated i Sigapore withi 10 days of the resolutio to wid up. Where a compay is already i volutary widig up, the Court may still grat leave to wid up the compay compulsorily if it is satisfied that it is ecessary to do so i the iterests of the compay s creditors ad cotributories. A guide to Asia Pacific restructurig ad isolvecy procedures 111

112 Liquidatio - Compulsory widig up The compay, creditors, cotributories, liquidator, judicial maager, or the Miister may preset a applicatio to the court to wid up the compay. The court may order a widig up of the compay o various grouds icludig (amogst others): (a) where the compay is uable to pay its debts as ad whe they fall due; (b) where the court is of the opiio that it is just ad equitable that the compay be woud up; (c) a ispector, appoited uder Part IX, has reported that the compay is uable to pay its debts or it is i the public s iterest that the compay be woud up. Oce the order is grated, the court may appoit the official receiver or a approved compay auditor to act as the liquidator. Usually the party presetig the widig up applicatio will omiate the liquidator ad a court order will make the appoitmet. If a liquidator is ot appoited whe the widig up order is made, the Official Receiver will become the provisioal liquidator util such other perso is appoited as the liquidator of the compay. The liquidator will assume custody of the compay s property, carry o the compay s busiess ad edeavour to repay the creditors debts. Liquidatio of a foreig compay Sectio 377 of the Compaies Act govers the cessatio of busiess i Sigapore of a foreig compay that is registered 112 A guide to Asia Pacific restructurig ad isolvecy procedures i Sigapore, for example, where it operates through a brach i Sigapore. A foreig compay has a obligatio to otify the Registrar of Compaies where the foreig compay ceases to carry o busiess i Sigapore or goes ito liquidatio i its place of icorporatio. Liability of Directors of the Compay i Liquidatio Directors of a compay i liquidatio may icur civil ad crimial liability i certai istaces. The Compaies Act imposes crimial liability o directors of a compay who will be liable to a fie of up to SGD10,000 or up to two years imprisomet. Crimial sactios do however require a itetio to defraud ad therefore a officer who acted hoestly could be regarded as havig a valid defece. The circumstaces i which a director may be crimially liable iclude: (a) failure to disclose fully to the liquidator all property of the compay; (b) failure to deliver up property, books or papers of the compay i his custody or possessio; (c) withi 12 moths prior to the commecemet of the widig up or at ay time thereafter, cocealmet of ay property of the compay or ay debt due to or from the compay to the value of SGD200 or upwards; (d) withi 12 moths prior to the commecemet of the widig up or at ay time thereafter, fraudulet removal of

113 ay property of the compay to the value of SGD200 or upwards; or (e) destructio, mutilatio, alteratio or falsificatio of ay books or papers belogig to the compay. I additio to crimial liability, a director may be persoally liable for the debts ad liabilities of the compay if he or she is foud to be resposible for the carryig o of the busiess of a compay with the itet to defraud creditors or for ay fraudulet purpose. A director may also be liable to compesate the compay if he or she has misapplied or retaied or becomes liable for compay property or is guilty of ay misfeasace or breach of trust or duty i relatio to the compay. Challeges to Atecedet Trasactios Trasactios at a Udervalue A liquidator may apply to the court to set aside trasactios at a udervalue etered ito withi five years prior to the oset of isolvecy. For this purpose a trasactio is at a udervalue if it costitutes a gift or if the value of the cosideratio received (i moey or moeys worth) is sigificatly less tha the cosideratio provided by the compay. The trasactio however will ot be set aside if the court is satisfied that the relevat trasactio was etered ito i good faith ad there were reasoable grouds for believig the trasactio would beefit the compay. The grat of security may possibly be the subject of a challege as a trasactio at udervalue. Ufair Preferece Trasactios A liquidator may apply to set aside trasactios which occurred withi six moths prior to the oset of isolvecy (this period is exteded to two years for trasactios ivolvig coected parties) which had the effect of puttig the creditor, surety or guarator i a better positio i the liquidatio tha would otherwise have bee the case. A compay must have bee iflueced i decidig to give the preferece by a desire to produce the effect of puttig the creditor i a better positio. If this desire is missig the trasactio will ot be ivalidated. Priority of claims A secured creditor eed ot prove for its debt ad ca realise its security despite the commecemet of liquidatio proceedigs. If the security is iadequate, the secured creditor is etitled to prove i liquidatio for the balace due as a usecured debt. All usecured creditors will have to lodge a proof of debt with the liquidator. Geerally, the order of priority for the distributio of the assets of a compay i liquidatio is as follows: (a) secured creditors; (b) liquidator s costs ad remueratio, ad the cost of realisig charged assets; (c) preferetial creditors (may be paid out of floatig charge assets, where there are isufficiet uecumbered assets); (d) usecured creditors; (e) members of the compay. A guide to Asia Pacific restructurig ad isolvecy procedures 113

114 Guaratees Guaratees are available i most circumstaces, for example dowstream, upstream or cross-stream guaratees. Corporate beefit issues eed to be addressed especially i the cotext of upstream ad cross-stream guaratees. A guaratee is a secodary obligatio by a third party relatig to a primary obligatio by a cotractig party (i.e. a borrower uder a loa agreemet). If the primary obligatio is altered, discharged or fails, the guaratee may ot be eforceable. Guaratees may be challeged ad set aside if they amout to a ufair preferece trasactio. New Moey Ledig I a scheme of arragemet or recostructio or judicial maagemet, the compay may be able to obtai additioal ledig which is accorded a priority of retur, if such arragemets are approved by the Court or agreed amogst the creditors. This priority of retur may be achieved through additioal security, or where the creditors first apply moeys received from the compay i repaymet of the ew moies let to the compay. Leder liability A leder may possibly be held to be liable to pay the compay s debts if it was foud to be actig as a shadow director of the compay. A shadow director is cosidered to be a director, as the defiitio of a director i the Compaies Act icludes a perso i accordace with whose directios or istructios the directors of a corporatio are accustomed to act. The liquidator is able to apply to the Court to make ay perso who was party to carryig o the compay s busiess i a fraudulet maer liable for the compay s debts. If the leder, as shadow director, has authorised the cotractig of a debt whe it had o reasoable expectatio of the debt beig repaid, the liquidator may apply to the Court to make the leder liable to pay that debt. However, the burde of provig fraudulet itet to establish such fraudulet tradig is geerally difficult to discharge. Cross-Border Assistace Sigapore is ot a sigatory to the Model Law or to ay other iteratioal treaties relatig to cross-border isolvecy. The curret practice i Sigapore i relatio to rederig assistace i cross-border isolvecies rests o judicial discretio. There are, however, geeral provisios that allow the Sigapore courts to assist a foreig party to eforce a foreig judgmet ad to obtai evidece required for the purposes of civil proceedigs that may be useful i cross-border reorgaisatio ad rescue matters. Upcomig chages The Govermet has set up the Sigapore Omibus Isolvecy Legislatio Committee which is desiged to look ito streamliig the existig persoal bakruptcy ad corporate isolvecy regimes ito a omibus isolvecy act. 114 A guide to Asia Pacific restructurig ad isolvecy procedures

115 The Miister of Law has also commissioed a Isolvecy Law Review Committee comprisig experieced isolvecy practitioers to carry out a review of Sigapore s isolvecy regime. Amog the issues uder study is how to deal with cross-border isolvecy. The fidigs of the Committee are expected to be released for public cosultatio i due course. A guide to Asia Pacific restructurig ad isolvecy procedures 115

116 Taiwa 116 A guide to Asia Pacific restructurig ad isolvecy procedures

117 Taiwa Cotributed by Russi & Vecchi Thomas H. McGowa/Kelly T.Y. Liu 9/F., No.205, Tu Hwa N. Rd. Taipei, Taiwa R.O.C. T: F: Key Elemets: Compositio ad reorgaisatio procedures focus o compay rehabilitatio Moratorium available Director liability Itroductio This sectio is desiged to provide a geeral outlie of the mai corporate isolvecy procedures available i Taiwa. Most of the legislatio relevat to isolvecy is cotaied i the Compay Law (1929) ad the Bakruptcy Law (1935). Uder the Compay Law, the terms isolvecy ad bakruptcy are used iterchageably. The Taiwaese govermet ad legislature have for several years bee i the process of reviewig draft amedmets to the Bakruptcy Law which, if eacted, would reame the law as the Debt Clearace Law ad icorporate the reorgaisatio provisios curretly foud i the Compay Law ito the reamed Act. The ew legislatio was made public for commet o Jauary 29, However, the curret status of the proposed legislatio is uclear, ad there is o reliable time lie as to whether ad whe it may be eacted. Uder the existig legislatio, there are four types of isolvecy proceedigs available i Taiwa: (1) Compositio; (2) Reorgaisatio; (3) Bakruptcy; ad (4) Special liquidatio. Compositio proceedigs are coducted with the ivolvemet of either the court or a local chamber of commerce, whilst the other proceedigs are required to be supervised by the court. The aim of the compositio ad reorgaisatio processes is to rehabilitate the etity. There are also specific regulatory actios which may be take to override geeral isolvecy proceedigs where the isolvet etity is i certai idustries such as the bakig or isurace idustries. Such regulatory actios are beyod the scope of this ote. Compositio Compositio allows for the compromise of debts by agreemet amog the creditors. Accordigly, there is o eed to obtai a formal court order declarig the compay bakrupt. A compositio is oly available where there is more tha oe creditor. A applicatio for a compositio may oly be made by the compay where it is uable to pay its debts. The court will cosider a compay s failure to pay its debts as evidece of a iability to satisfy its debt. The compay may apply to the court (or the local chamber of commerce) for a supervised compositio. The compay must iclude a statemet of affairs ad a proposal for satisfyig the creditors claims. The court must either approve or dismiss the applicatio for compositio proceedigs withi seve days of receivig the applicatio. No appeal agaist this rulig is allowed. A guide to Asia Pacific restructurig ad isolvecy procedures 117

118 If the court approves the applicatio, it will provide otice to the public of the approval, followig which creditors are required to register their claims. Withi oe moth after the expiratio of the creditors registratio period, a creditors meetig must be held to accept the compositio. A resolutio to accept the compositio requires a majority vote of creditors preset at the creditors meetig holdig at least two-thirds of the total usecured debts. The resolutio of compositio is the subject to court approval. Oce the compositio is approved, the court will typically desigate a judge to supervise the implemetatio of the compositio arragemet ad select up to two assistat supervisors from amog chartered public accoutats, persos desigated by the local chamber of commerce or other appropriate persos. The primary duty of the assistat supervisors is to esure that o actio is take to prejudice the iterests of creditors. The compay will the cotiue busiess uder its icumbet maagemet actig uder the supervisio of the supervisors. A appeal agaist the approval of the resolutio of compositio may be filed with the court. This appeal, however, is oly available for creditors who have previously objected to the court i relatio to the compositio, or whose participatio i the compositio has bee rejected. Durig the compositio period, secured creditors are free to eforce their security. A moratorium, however, is effective i respect of usecured creditors. All existig compulsory executio proceedigs iitiated by usecured creditors are suspeded. Ay debts icurred after the commecemet of the compositio are ot affected by the moratorium period. If a court dismisses a compositio applicatio or does ot approve the resolutio of compositio, the court has discretio to order the commecemet of bakruptcy procedures. A compay is also permitted, without first applyig to the court for compositio or bakruptcy, to apply directly to the local chamber of commerce for a supervised compositio. Certai (but ot all) provisios with respect to the compositio procedure supervised by the court (e.g. the process, reasos for dismissal of compositio applicatio, restrictio o compulsory eforcemet, ad effect of the resolutio of compositio approved by the court) are geerally applicable to the compositio procedure supervised by the local chamber of commerce. A resolutio of compositio approved by the court is geerally bidig o all creditors whose claims arise before the compositio applicatio was made. Reorgaisatio Reorgaisatio is pricipally a procedure iteded to rescue compaies which are or may become isolvet. The process is available exclusively to compaies with publically listed shares or corporate bods i circumstaces where the compay suspeds its busiess due to fiacial difficulties, or where there is apprehesio that the busiess will be suspeded due to fiacial difficulties. The reorgaisatio procedure is iitiated by a applicatio to the court by the compay or its directors, shareholders holdig at least 10% of the total shares for ot less tha six moths, or creditors whose claims are equivalet to at least 10% of the total share capital. 118 A guide to Asia Pacific restructurig ad isolvecy procedures

119 A court is required to issue a reorgaisatio rulig to approve or dismiss a applicatio for reorgaisatio withi 120 days of receivig the applicatio. The 120-day period may be exteded twice provided that each such extesio is ot permitted to exceed 30 days. A compay is ot eligible to apply for, ad the court will ot approve a reorgaisatio where there is o possibility that the compay will be able to rehabilitate itself. A court will dismiss a applicatio for reorgaisatio if the isolvet compay fails to meet the statutory requiremets i particular, if the compay fails to comply with the applicatio procedure, if the compay is ot a publicly listed compay, if the compay has bee declared bakrupt by the court, if the compay has reached a resolutio of compositio as stated above, if the compay has bee dissolved or if the compay has bee suspeded from busiess ad required to clear its debts. Prior to the court approvig the reorgaisatio, the compay or certai iterested parties (beig creditors or shareholders of a certai percetage) may apply to have the compay s assets preserved for a period of up to 90 days (which may be exteded oce for a additioal 90 days). Oce a applicatio for reorgaisatio is approved by the court, ay bakruptcy, compositio ad/or litigatio proceedigs (icludig compulsory executio agaist the compay) is suspeded. O appoitmet of a admiistrator the directors are displaced ad their powers of maagemet are vested i the admiistrator. All creditors (icludig creditors with priority, secured creditors ad usecured creditors) ad shareholders are required to register their claims or shareholder rights, withi the time limit ad at the place set out i the reorgaisatio rulig, to participate i the reorgaisatio procedure ad exercise their rights. Ulike bakruptcy, creditors with priority ad secured creditors are ot exempt from registerig their claims i a reorgaisatio. A admiistrator must prepare a restructurig pla which is subject to (i) the approval of meetigs of each iterested party group (i.e. creditors with priority, secured creditors, usecured creditors ad shareholders) requirig approval by majority vote of each group (votig withi the creditor groups is weighted by the amout of debt, while votig withi the shareholder group is weighted by the umber of shares held) ad (ii) the approval by the court. However, if the compay has egative et worth, shareholders lose their rights to vote over the pla. If a restructurig pla is ot approved by the iterested parties, the court may order revisios of the restructurig pla ad order the iterested parties to vote agai o the revised pla withi oe moth. If the revised pla is still ot acceptable to the iterested parties, the court is required to termiate the reorgaisatio procedure ad, if the compay meets the bakruptcy requiremets, declare the compay bakrupt. Upo completio of a reorgaisatio of a compay: (i) all uregistered claims ad those registered claims which are ot provided for i the pla are extiguished; (ii) uregistered shareholder rights ad shareholder rights which are reduced or cacelled by the pla are extiguished; ad (iii) ay bakruptcy, compositio, compulsory executio ad other litigatio proceedigs agaist the property of the compay commeced prior to the completio become ieffective. A guide to Asia Pacific restructurig ad isolvecy procedures 119

120 Corporate reorgaisatio is a legthy process ad has bee abused by compaies which have used the procedure as a egotiatio tool to reduce the amout of debt ad/or iterest owed to creditors. Accordigly, this process is ot favoured by creditors. Bakruptcy/Liquidatio Bakruptcy is declared agaist a compay that is uable to pay its debts, ad the bakrupt compay loses the right to maage ad dispose of property formig part of the bakrupt estate. These powers vest i the trustee or liquidator of the compay upo a declaratio of bakruptcy. If a compay s assets are ot sufficiet to satisfy its debts, the liquidator is required to apply to the court to declare the compay bakrupt. The court will regard a failure by the compay to pay its debts as evidece that the compay is uable to satisfy its debts. A bakruptcy applicatio may be lodged at ay time by the compay or a creditor, icludig durig the compositio procedure. The court is required to declare the compay bakrupt or dismiss the applicatio for bakruptcy withi seve days (which may be exteded oce for a additioal seve days) of receivig the applicatio. The court will dismiss the applicatio if (i) it forms the view that there is a possibility of a successful compositio or, (ii) the court fids through ivestigatio that the bakruptcy proceedig would geerate o beefit to a large majority of creditors give that the compay has o assets or oly omial assets which are isufficiet to pay eve the bakruptcy trustee s fees. Where a compay is declared bakrupt, all pedig litigatio proceedigs agaist the property of the isolvet compay are suspeded ad a trustee i bakruptcy will be appoited by the court. The court is also required to state i the bakruptcy declaratio, a period of betwee 15 days ad 3 moths for usecured creditors to register claims (secured creditors are exempt from such registratio requiremet). Uregistered usecured creditors are uable to share i the proceeds of the liquidated compay. The trustee will prepare a list of creditors claims. A creditors meetig will be called by the court o the applicatio of the trustee i bakruptcy, where resolutios may be passed: (a) electig oe or more supervisors to represet the creditors i the bakruptcy process; (b) prescribig the method of the admiistratio of the bakrupt s estate; ad (c) determiig whether the busiess of the bakrupt should cotiue. To carry, the resolutio geerally requires the coset by a majority vote of creditors preset at the creditors meetig holdig more tha oe-half of the total claim amout (which refers to the total registered claim amout). Distributios are made o a pro rata basis. Secured creditors, however, have exclusive rights i respect of the secured property ad are free to eforce agaist the secured property through foreclosure aytime throughout the bakruptcy proceedigs. Trustee fees, debts arisig out of actios take by the trustee for the maagemet of the debtor property durig the bakruptcy procedure, tax claims ad employee claims ejoy priority over the claims of usecured creditors i the distributio of proceeds. The trustee or assistat supervisors may be puished for solicitig or receivig bribes or other ujust iterests. 120 A guide to Asia Pacific restructurig ad isolvecy procedures

121 Special Liquidatio The court may, at its discretio or actig upo the petitio of the regular liquidator, shareholder or creditor, order a special liquidatio. This is performed i circumstaces where a compay has bee placed ito liquidatio ad there is difficulty i coductig a liquidatio or doubts as to the accuracy of the compay s books. The effect of a special liquidatio is that the liquidator will take over the maagemet of the compay. No busiess activity ca be carried o uless it is ecessary for the liquidatio. The liquidator, withi the claim registratio period, is ot able to make paymets to usecured creditors but may, with the court s approval, pay secured claims. Subject to the rights of secured creditors ad preferetial creditors, distributios are made o a pro rata basis. Durig a special liquidatio, usecured creditors meetigs may be held at the liquidator s discretio or upo the request of usecured creditors represetig ot less tha 10% of the total usecured debts of the compay. The liquidator may propose a agreemet of settlemet to be approved i a usecured creditors meetig atteded by usecured creditors represetig more tha oe-half of the usecured debts ad approved by usecured creditors represetig ot less tha three quarters of the total usecured debts. If a agreemet of settlemet is ot approved or is ot feasible, the court has discretio to order the commecemet of the bakruptcy procedures. Challeges to Atecedet Trasactios Durig the bakruptcy procedure, the trustee has the power to disclaim (i) ay agreemets made by the compay prior to the declaratio of bakruptcy that are cosidered detrimetal to creditors, or (ii) guaratees made withi the six moth period prior to the adjudicatio of bakruptcy. The trustee may recover ay udue paymet made withi the six moth period prior to the declaratio of bakruptcy. The trustee also has the power to disclaim ay lease cotract etered ito by the compay as lessee, ad the lessor has o remedy i such evet. There are o other specific provisios providig a basis to challege atecedet trasactios except for geeral Civil Code rights of revocatio. Eforcemet process by Secured Creditors Oce isolvecy proceedigs (other tha a reorgaisatio) have bee commeced, a moratorium comes ito effect but it does ot prevet secured creditors from eforcig their security. Where reorgaisatio proceedigs are uderway, secured creditors are geerally barred from eforcig their security over property through foreclosure. Persoal Liability of Directors As a geeral rule, directors of a compay do ot have persoal liability for the debts of the compay. However, i coectio with a reorgaisatio, a director of the compay (as well as the supervisor, maager or other staff) will be liable to oe-year imprisomet, retetio ad/or crimial fies if he or she egages i ay of the followig: (a) refusig to trasfer the maagemet of busiess or property to the admiistrator; (b) hidig or destroyig the accout records i relatio to the compay s busiess or fiacial status; (c) hidig or disposig the compay s assets or egagig i ay disposal which is detrimetal to creditors; A guide to Asia Pacific restructurig ad isolvecy procedures 121

122 (d) refusig to respod to the admiistrator s iquiry as to the compay s busiess ad fiacial status without justifiable reasos; or (e) fabricatio of debts or ackowledgemet of utrue debts. A director of the compay uder a compositio or bakruptcy procedure is liable to the followig: (a) oe-year imprisomet if the director violates its obligatio to provide or trasfer the statemets or accout records to the trustee, refuses to respod to the trustee s iquiry or makes a false statemet to the trustee; (b) five-year imprisomet if, withi oe year before the bakruptcy declaratio or durig the bakruptcy proceedigs, the compay is foud to petitio a bakruptcy i fraud with the itet to damage the creditors; (c) five-year imprisomet if the compay is foud to apply for a compositio i fraud with the itet to damage the creditors after its approval of the compositio; ad (d) oe-year imprisomet if, withi oe year before the declaratio of bakruptcy, the compay (i) wastes the assets of or improperly icreases the compay s debt, (ii) assumes debts, makes purchases or disposes of goods uder terms which are disadvatageous to the compay with the itetio to delay the bakruptcy, (iii) provides collateral where there is o obligatio to provide collateral or icurs fraudulet debts i favor of specific creditors with the kowledge that the compay is i bakruptcy (iv) releases debts with o due cosideratio. Leder Liability At preset there are o laws, regulatios or court precedets imposig liability o leders i coectio with isolvecy proceedigs. Guaratees Uder Taiwaese law, creditors rights agaist guarators of the isolvet compay s debts ad joit-debtors with the isolvet compay will ot be affected by the compositio or reorgaisatio procedure. New Moey Ledig The admiistrator of a reorgaisatio procedure ad a liquidator of a special liquidatio procedure, subject to the coset of the supervisor, are permitted to borrow moey o behalf of the isolvet compay. Ay borrowigs ad other debts icurred for the purpose of maitaiig the compay s busiess durig the reorgaisatio procedure will have priority over other usecured debts of the compay. Debts arisig out of ay actio take by the trustee for the maagemet of the debtor s property durig the bakruptcy procedure will also have priority over other usecured debts of the compay. Recogitio of Foreig Isolvecy Proceedigs I priciple, a foreig fial judgmet or rulig, subject to certai coditios, will be recogised by Taiwa. However, Taiwaese Bakruptcy Law states that a compositio reached i a foreig coutry or a bakruptcy declared i a foreig coutry does ot have ay ifluece o the compay s property located withi the territory of the Republic of Chia. 122 A guide to Asia Pacific restructurig ad isolvecy procedures

123 A guide to Asia Pacific restructurig ad isolvecy procedures 123

124 Thailad 124 A guide to Asia Pacific restructurig ad isolvecy procedures

125 Thailad Cotributed by Clifford Chace (Bagkok office) Key Elemets: Automatic moratorium for busiess rehabilitatio No volutary bakruptcy procedure available to debtors Isolvecy procedures are coducted or supervised by official receivers Itroductio This sectio provides a geeral outlie of the mai corporate isolvecy procedures i Thailad. Corporate isolvecy i Thailad is pricipally govered by the Bakruptcy Act 1940 (last ameded i 2004) (the Bakruptcy Act ) ad the Civil ad Commercial Code ( CCC ). The mai procedures ecoutered i corporate isolvecies are: (1) bakruptcy (icludig compositio); ad (2) busiess rehabilitatio. A debtor or its creditors may file for busiess rehabilitatio. Bakruptcy, o the other had, may oly be iitiated by creditors. The competet body to exercise jurisdictio i isolvecy matters is the Cetral Bakruptcy Court (the Court ). A solvet liquidatio may be udertake by ay perso. A isolvet liquidatio, however, may oly be coducted by the official receiver. Thai law does ot provide for a volutary bakruptcy procedure. This ote will ot cover solvet widig up procedures or the bakruptcy of idividuals. Isolvecy Test The debtor is presumed to be isolvet where: (1) The debtor declares to the Court or iforms its creditors that it caot pay its debts. (2) The debtor has submitted a proposal for compositio of its debt to two or more creditors. (3) The debtor has received ot less tha 2 demad letters withi 30 days ad has ot yet paid a sum accordig to the demad. I additio to the tests relatig to failure to pay, a debtor will also be deemed isolvet where: (a) The debtor has trasferred its assets or the rights to maage its assets to aother perso for the beefit of that other perso s creditors. (b) The debtor has trasferred or delivered its assets with dishoesty or fraudulet itet. (c) The debtor has trasferred or created rights which would, i the situatio of bakruptcy, be cosidered a act of preferece. (d) The debtor has delayed its paymet by closig its busiess, coseted to a judgmet order for a paymet which it should ot pay, or has removed assets out of the court s jurisdictio. (e) The debtor s assets are attached uder a writ of executio, or there are o assets capable of attachmet. A guide to Asia Pacific restructurig ad isolvecy procedures 125

126 Bakruptcy If a creditor is owed more tha THB2,000,000 by a debtor compay, it may commece bakruptcy proceedigs agaist the isolvet debtor by filig a petitio or claim with the Court. The mai objective of bakruptcy is to place the debtor ito receivership ad appoit a official receiver to liquidate the debtor ad distribute the proceeds to creditors. Appoitmet of Official Receiver The court will schedule a prelimiary hearig date, usually six weeks after the claim is filed with the court, to examie witesses ad schedule future hearig dates for a trial. If, by the ed of the trial, the Court issues a absolute receivership order, it will be published i the Thai Govermet Gazette ad at least oe daily ewspaper. Oce a receivership order is issued, the debtor is prohibited from dealig with its assets except by order of the Court or with the approval of the official receiver or the creditors (provided at a creditors meetig). Oly the Miister of Justice ca appoit a official to be a official receiver. Eligible creditors must file a claim withi two moths from the date of publicatio of the order of absolute receivership. No-residet creditors may be grated a further two moth extesio, however they must prove that Thai creditors ejoy reciprocal rights to participate i proceedigs i their respective coutries, ad must agree to reliquish ay property of the debtor outside Thailad for the beefit of all creditors. A creditor caot file a claim for the repaymet of a debt where the creditor kew the debtor was isolvet at the time the debt was icurred, uless the debt was icurred i order for the debtor s busiess to be able to cotiue its operatios. 126 A guide to Asia Pacific restructurig ad isolvecy procedures Fuctios ad Duties of the Official Receiver The official receiver will examie all claims submitted by the creditors ad cosider whether to accept or reject such claims. Afterwards, the official receiver will report its opiio ad sed the file of such claims to the Court. If there is o objectio by the debtor, its creditors or the official receiver, the Court will approve the filed claims. The official receiver will automatically be empowered to take cotrol of the debtor ad maage the debtor s busiess, icludig takig custody of its property ad actig o behalf of the debtor i civil actios. The official receiver ca also call creditors meetigs ad offer a compromise for the settlemet of debts with the debtor s creditors. If the creditors decide that the debtor should be declared bakrupt, the Court will issue a bakruptcy order ad the liquidatio process will commece. The proceeds from the realisatio of the debtor s assets by the official receiver will the be distributed to the creditors i the followig order of priority (o a pro-rata basis if proceeds are isufficiet for ay category): (a) official receiver s costs ad expeses for maagig ad realisig the debtor s property; (b) court fees for collectig the debtor s property; (c) fees of the petitioig creditor ad cousel s fees as the Court or the official receiver may prescribe; (d) taxes due withi six moths prior to the court order for receivership ad wages of the debtor s employees; ad (e) ay other debts.

127 Secured Creditors Secured creditors are etitled to eforce their security without filig a claim for repaymet uder the bakruptcy procedure. However, i order to be etitled to vote as a creditor uder the bakruptcy procedure, a secured creditor is required to file a claim for repaymet. Compositio A debtor may submit a proposal for the compositio of its debts, whereupo the official receiver must call a creditors meetig as soo as possible to cosider whether the proposal should be accepted or whether the debtor should be declared bakrupt. A resolutio will carry if approved by creditors represetig more tha 50% i umber ad at least 75% i value. If the creditors decide that the debtor should be declared bakrupt, the Court will issue a bakruptcy order ad the liquidatio process will commece. If the compositio pla is accepted by creditors, it must the be approved by the court at which poit it will become bidig o all creditors. After the Court approves the compositio pla, the debtor will ot be at risk of bakruptcy, other tha for claims relatig to tax ad the debtor s fraudulet behavior. At the same time, icumbet maagemet will retai cotrol of the compay subject to the directio of the Court. Busiess rehabilitatio Busiess rehabilitatio is a court-supervised formal attempt to restructure the fiaces of a distressed eterprise. The procedure may be commeced by a debtor, creditor or competet govermetal authority empowered uder the Bakruptcy Act to supervise certai busiesses (for example, the Bak of Thailad i respect of a commercial bak). A petitio for busiess rehabilitatio may be filed with the Court if the debtor: is isolvet; ad owes at least THB10,000,000 to oe or more creditors. Upo the Court acceptig the petitio, a official receiver is appoited to supervise the busiess rehabilitatio ad a automatic stay comes ito effect. Secured creditors will ot be able to eforce their security without court approval. The automatic stay will cotiue util the rehabilitatio pla has either expired or bee executed. A Court hearig will be held to determie whether a rehabilitatio order should be made. Factors take ito accout iclude the fiacial status of the debtor ad the potetial for a successful rehabilitatio of the busiess. Oce the rehabilitatio order is made, the Court will appoit a perso who is geerally omiated by the debtor as a pla preparer to formulate ad prepare the busiess rehabilitatio pla. If the Court is of the opiio that such perso is ot suitable to formulate a pla, the Court will order the official receiver to call a creditors meetig as soo as possible to cosider a suitable replacemet. The automatic stay remais i effect durig this period. The pla preparer must categorise the creditors ito the followig separate groups for the purpose of votig for approval of the busiess rehabilitatio pla A guide to Asia Pacific restructurig ad isolvecy procedures 127

128 (a) each secured creditor with secured debt equal to or i excess of 15% of the total debts claimable i the busiess rehabilitatio process; (b) secured creditors other tha those referred to i (a) above; (c) usecured creditors (who may be further divided ito differet sub-categories); ad (d) subordiated creditors. Creditors withi the same group must be treated equally i the busiess rehabilitatio pla. The proposed pla must be approved by either 75% i value ad 50% i umber of each class of creditors, or 75% i value ad 50% i umber of oe class of creditors together with 50% i value of all creditors. Creditors with debts that were icurred before the date of the rehabilitatio order must file their claims with the official receiver withi oe moth of the publicatio of the appoitmet of the pla preparer i the Royal Gazette. Where the pla is ot approved by creditors, the Court will issue a order cacelig the busiess rehabilitatio order ad the automatic stay will cease to apply. The Court may cotiue ay bakruptcy proceedigs commeced before the busiess rehabilitatio procedures bega. If the pla is approved by the creditors ad the Court, a pla admiistrator will be appoited i order to implemet the approved busiess rehabilitatio pla. Uder the pla, creditors will be categorised ito several classes with differig treatmet i respect of each class. Creditors may file a motio with the Court challegig the pla o the basis that it fails to treat creditors of the same class equitably. 128 A guide to Asia Pacific restructurig ad isolvecy procedures If the busiess rehabilitatio is ot successfully implemeted withi the allotted time period, which is usually five years, but up to a maximum of seve years (if two extesios for a period of oe year each are allowed), the Court may declare the debtor bakrupt ad order the commecemet of liquidatio. Challeges to Voidable Trasactios Each of the official receiver, the pla preparer ad the pla admiistrator have the power to file a motio with the Court for a order to cacel a fraudulet act or udue preferece. A fraudulet act uder the CCC is a trasactio etered ito by the debtor where the debtor ad the couterparty have kowledge that such actio would prejudice other creditors. If the trasactio ivolves a gratuitous act, oly the debtor eed have kowledge that such actio would be prejudicial to creditors. A prejudiced creditor is etitled to request the cacellatio of the offedig trasactio by the Court of Justice. I additio, uder the Bakruptcy Act, the official receiver, the pla preparer ad the pla admiistrator have the power to file a motio with the Court for a order to cacel a fraudulet act if the act took place withi oe year prior to the filig of a petitio for bakruptcy or busiess rehabilitatio, or occurred aytime thereafter. I the case of a udue preferece, the official receiver, the pla preparer ad the pla admiistrator have the power to file a motio askig the Court to cacel ay trasfer of a asset or ay act carried out by the debtor with the itetio to give udue preferece to a creditor, where the trasfer or act occurred withi three moths (or oe year if the trasfer/act was doe with a coected perso ) prior to the filig of a petitio for bakruptcy or busiess rehabilitatio, aytime or thereafter.

129 Director Liability The Bakruptcy Act states that for a period of oe year prior to the bakruptcy of a debtor or aytime thereafter, but before the issuace of a receivership order, the debtor, a officer, a liquidator, a director, represetative or employee of the debtor is liable to imprisomet or a fie for: (a) frauduletly tamperig with accouts or documets relatig to the busiess of the debtor; (b) omittig to record material matters or makig false etries i the accouts or documets relatig to the debtor s busiess or assets; (c) pledgig, mortgagig or disposig of the property which was obtaied o credit for which the price has ot bee paid (uless i the ordiary course of busiess ad i the absece of ay itetioal fraud); ad/or (d) receivig goods o credit usig false preteces. It should be oted that persoal liability may be imposed o a director by virtue of other laws such as i relatio to fraud (Sectio 341 of the Crimial Code) or where a director does ot comply with obligatios uder the Determiig Offece relatig to the Register Partership, Limited Partership, Limited Compay, Associatio ad Foudatio B.E This icludes, for example, a director that does ot summo a extraordiary meetig uder the CCC, or coceals from the meetig a material matter that relates to the compay s fiacial statemets. Uder the CCC, a director has a duty to coduct the busiess of the compay with the diligece of a careful busiessma. If a director causes loss to a compay through o-compliace with this duty, the compay or its shareholders ca claim agaist the director for the loss suffered. Similarly, i relatio to a public compay, a director has a duty to coduct busiess i compliace with all laws, the objects ad the articles of associatio of the public compay, ad the resolutios of shareholder meetigs. Directors must also act i good faith ad with care to preserve the iterests of the compay. If a director fails to discharge these duties, the public compay or its shareholders ca make a claim agaist the director. Where the compay is a listed compay, the directors must also comply with the Securities ad Exchage Act which imposes a fiduciary duty o directors towards the compay, ad imposes crimial sactios if the directors fail to comply. Guaratees There is o restrictio that prohibits a Thai compay from givig a guaratee if it has the legal capacity to do so ad it is withi the compay s objects. This applies to both upstream ad dowstream guaratees. A guaratee give by a bakrupt compay or a compay subject to busiess reorgaisatio may be subject to challege, for example, where it would costitute a fraudulet act or a udue preferece uder the Bakruptcy Act (See Voidable Trasactios). New Moey Ledig Uless otherwise provided for i the busiess rehabilitatio pla, the status of ew fuds provided durig the rehabilitatio procedure ca be separated ito the followig two categories: (a) Fuds provided durig the period betwee whe the Court issues a order to rehabilitate the busiess ad whe the A guide to Asia Pacific restructurig ad isolvecy procedures 129

130 Court appoits the pla preparer. I order for a creditor to be etitled to repaymet, the debt must oly be icurred by the official receiver or iterim executive, ad the creditor must have a letter cofirmig the claims issued by the pla preparer. I this regard, creditors are ot required to file a claim pursuat to the procedures uder the Bakruptcy Act. Istead, creditors are etitled to repaymet accordig to the time periods stipulated i the busiess rehabilitatio pla. (b) Fuds provided after the Court approves the pla for busiess rehabilitatio pursuat to the pla. As above, creditors are etitled to repaymet i accordace with the busiess rehabilitatio pla ad are ot required to file a claim pursuat to procedures uder the Bakruptcy Act. A creditor who provides a loa will ot be subject to the automatic stay of the Bakruptcy Act ad may eforce its rights whe the debt matures. Leder Liability A leder or creditor may attract liability from (i) ivolvemet i a fraudulet act, or (ii) earig a beefit that costitutes a udue preferece. The official receiver, the pla preparer ad the pla admiistrator ca file a motio with the Court for a order to cacel a fraudulet act or udue preferece (see Voidable Trasactios). Whether the fraudulet act or udue preferece results i liability to the creditor will deped o the act itself. For example, if a debtor s property is trasferred to a creditor to prevet the other leders from receivig paymet, such a act would costitute a offece by the debtor ad this carries a puishmet of imprisomet for a period ot exceedig 2 years or a fie ot exceedig THB4,000. A creditor will also be deemed to have committed a offece where it assists or supports the debtor i committig such a act or takes part i the commissio of such actio. Moreover, if a creditor helps or supports the debtor to commit a fraudulet act or grat a udue preferece, ad this causes the loss of property or ay other right of the other creditors, the offedig creditor may be liable o the basis of tort uder the CCC. Aggrieved creditors may take legal actio agaist the creditor to recover their loss. A example of a fraudulet act is the creatio of a o-existet liability or debt to dilute the proportioal rights of the existig creditors. Cross-border Isolvecy There is o established procedure or practice regardig the recogitio of foreig isolvecy proceedigs i Thailad. The Bakruptcy Act clearly states that the receivership of a asset or a bakruptcy actio relates oly to the assets of the debtor located withi the Kigdom of Thailad. The receivership of a asset or a bakruptcy actio iitiated i a foreig coutry has o bearig or effect o the assets of a debtor located i the Kigdom of Thailad. Thailad is ot a party to ay covetio which recogises foreig judgmets, ad therefore foreig judgmets are ot eforceable i Thailad. Thai courts may, however, accept foreig judgmets as evidece for the purposes of local isolvecy. 130 A guide to Asia Pacific restructurig ad isolvecy procedures

131 A guide to Asia Pacific restructurig ad isolvecy procedures 131

132 Vietam 132 A guide to Asia Pacific restructurig ad isolvecy procedures

133 Vietam Cotributed by Vilaf, Vietam Iteratioal Law Firm Tra Tua Phog, Maagig Parter Suite 603, HCO Buildig (Melia) 44B Ly Thuog Kiet St Haoi, Vietam T: F: Key Elemets: Rehabilitatio procedure focuses o the rescue of the eterprise Asset Admiistratio ad Liquidatio Team appoited to assist i the supervisio of the eterprise Test for isolvecy requires a failure to pay due debts Emergecy measures for the beefit of creditors Itroductio This sectio provides a geeral outlie of the mai corporate isolvecy procedures i Vietam. The legislatio goverig isolvecy i Vietam is set out i: (1) the Law o Bakruptcy (No QH11), dated 15 Jue 2004 which came ito effect o 15 October 2004 ( Bakruptcy Law ). The Bakruptcy Law is the primary source of isolvecy legislatio i Vietam ad has bee further clarified ad added to by a umber of implemetig regulatios ad guidelies issued by the Supreme Court, the Miistry of Fiace ad the Miistry of Justice; ad (2) the Law o Eterprises (No QH11) dated 29 November 2005 which came ito effect o July 2006 ( Law o Eterprises ). The Law o Eterprise provides that ay eterprise which is i bakruptcy is subject to the Bakruptcy Law. The Law o Bakruptcy applies to eterprises ad co-operatives operatig uder Vietamese law. Curretly, there is o such regime which govers the bakruptcy or isolvecy of idividuals. The Bakruptcy Law provides for a geeral bakruptcy procedure, which is a court supervised process that results i the court placig the eterprise ito either: a restoratio procedure, a process desiged to rehabilitate the eterprise so that is may cotiue to operate as a goig cocer; or a liquidatio procedure, which provides for the liquidatio of the eterprise ad the distributio of proceeds to its creditors. Recet icreases i the umber of isolvecies i Vietam have highlighted shortcomigs i the Bakruptcy Law. The Miistry of Justice recetly published a report ackowledgig a umber of iadequacies i the Bakruptcy Law ad called for the Govermet ad related bodies (Supreme People s Court, Miistry of Justice, Supreme People s Procuracy, Miistry of Fiace ad Miistry of Plaig ad Ivestmet) to cooperate ad address such shortcomigs. It remais to be see whether the report will operate as a impetus for reform of the Bakruptcy Law. Separate regimes gover the bakruptcy procedures relatig to credit istitutios, isurace, securities ad other fiace compaies, ad special eterprises directly servig defese ad security. Isolvecy relatig to these types of istitutios is beyod the scope of this ote. Test of Isolvecy Pursuat to Article 3 of the Bakruptcy Law, a eterprise is cosidered isolvet if it is uable to pay the due debts upo request by its creditors. Due debts must be expressly A guide to Asia Pacific restructurig ad isolvecy procedures 133

134 recogised by the relevat parties, supported by adequate documetatio ad free from dispute. Bakruptcy Procedure O the failure of a eterprise to pay its due debts o request, ay usecured or partially secured creditor (to which a due debt remais upaid) or ay shareholder of the eterprise may file a bakruptcy petitio with the court. The filig of a bakruptcy petitio by a creditor must be supported by documetatio that shows the creditor has made a request to the eterprise for paymet of a due debt ad that the eterprise has failed to comply with the request. Supportig documetatio ofte icludes a writte paymet demad or a extesio of paymet terms offered by the creditor. Accordigly: (a) a eterprise will ot be isolvet uless its debts have falle due, eve if the eterprise is isolvet o a cash-flow or balace sheet basis; (b) whe cosiderig a bakruptcy petitio, the court will cosider whether the eterprise has bee give adequate opportuity by its creditors to agree o the extesio of paymet terms ad/or to arrage sufficiet fiacial resources to pay its creditors; ad (c) a eterprise will oly be deemed isolvet where the eterprise fails to pay its due debts ad its creditors do ot agree to ay further paymet extesios. Milestoes i the Bakruptcy Procedure The bakruptcy procedure i Vietam is as follows: (a) the filig of a bakruptcy petitio with the court; (b) acceptace or rejectio of the petitio (if the court accepts the petitio, it has 30 days i which to decide whether or ot to commece bakruptcy proceedigs); (c) appoitmet of the Asset Admiistratio ad Liquidatio Team ( AALT ); (d) first creditors meetig; (e) either: (f) (i) the eterprise is placed ito the restoratio procedure with a view to restorig the eterprise as a goig cocer ( Restoratio ). If Restoratio fails, the court will place the eterprise ito liquidatio; or (ii) the eterprise is placed ito liquidatio with a view to realisig the eterprise s assets ad distributig the proceeds to its stakeholders i the relevat order of priority ( Liquidatio ); ad the fial act is a declaratio of bakruptcy by the court, (together the Bakruptcy Procedures ). At ay stage durig the Bakruptcy Procedures, the court may covert Restoratio proceedigs ito Liquidatio proceedigs or declare the eterprise bakrupt. 134 A guide to Asia Pacific restructurig ad isolvecy procedures

135 Parties eligible to file bakruptcy petitios The followig parties may file a petitio with the court to commece the Bakruptcy Procedures agaist a eterprise: the eterprise itself (i.e. the legal represetative of the eterprise, who is required to file a petitio withi three moths of becomig aware that the eterprise is isolvet); a State eterprise ower; shareholders or a group of shareholders who have the right to file a bakruptcy petitio as stated i the charter or as resolved i a geeral meetig of shareholders; usecured or partially secured creditors; ad employees of the eterprise. Ay perso who files a dishoest petitio or a petitio without due cause together with itetio to harm the hoour, reputatio or operatios of a eterprise, is liable to a admiistrative pealty ad to compesatio for ay damage suffered by the eterprise. Filig ad acceptace of a petitio for Bakruptcy Procedures A petitio for Bakruptcy Procedures must be accompaied by evidece of the eterprise s isolvecy status ad the applicable fee. A usecured or partly secured creditor is ot required to wait util the due date for paymet has passed before filig a bakruptcy petitio if other due debts remai outstadig by the eterprise. A petitio may be submitted so log as there is a outstadig debt ad the eterprise is o the verge of bakruptcy. If the eterprise ca prove it is ot isolvet, the court will reject the petitio. If the Court accepts the petitio, it must otify the eterprise withi 5 days of acceptace. The Court will issue a decisio o whether it will iitiate the Bakruptcy Procedures withi 30 days from the date of acceptace of the petitio. Creditors ad debtors of the eterprise are also etitled to otice of the decisio. Usecured or partly secured creditors must submit with their petitio a list of due debts together with supportig documetatio of ay requests for paymet of such debts. Where the eterprise is o the verge of bakruptcy, a failure by the eterprise to pay wages ad other debts owed to employees provides grouds for employees to file a bakruptcy petitio. Upaid employees must itemise i the petitio the umber of moths their salaries remai upaid ad the total amout of salaries ad other debts which are owed to them. Applicable Court Pursuat to the Bakruptcy Law, Bakruptcy Procedures are to be hadled by a sigle judge i the district court, ad by a sigle judge or a pael of three judges i a provicial or muicipal court. The bakruptcy jurisdictio of the district court is limited to co-operatives whose busiesses have bee registered i the relevat district. Commecemet of Bakruptcy Procedures After careful cosideratio of the evidece of the eterprise s bakruptcy status, the court will decide whether to iitiate the Bakruptcy Procedures. It is also at this stage that the court decides whether to place the eterprise ito Restoratio, Liquidatio or to declare the eterprise bakrupt. A guide to Asia Pacific restructurig ad isolvecy procedures 135

136 If the court places the eterprise ito Restoratio, the eterprise must submit to the court: (a) a statemet of profit ad loss explaiig the cause of its upaid debts; (b) a report o measures take to remedy the situatio; (c) a detailed list of the eterprise s assets; (d) a list of creditors detailig secured ad usecured debts that are outstadig ad ot yet due; ad (e) a list of debtors detailig secured ad usecured debts that are outstadig ad ot yet due. The creditors of the eterprise are also required to submit to the court details of their paymet requests. Appoitmet of Asset Admiistratio ad Liquidatio Team After the court iitiates the Bakruptcy Procedures, a eterprise may cotiue to coduct its busiess uder the supervisio of the court ad the AALT. The AALT is established after a petitio to commece Bakruptcy Procedures is accepted by the court ad is comprised of a bailiff, a represetative of the creditors, a legal represetative of the eterprise, ad subject to the supervisory judge s discretio, a uio represetative, a represetative of employees ad a represetative of a expert istitutio. The court may also appoit a perso as maager ad operator of the eterprise s busiess if the existig maagemet lack the ability to operate the busiess or where allowig the existig maagemet to cotiue would put the preservatio of the eterprise s assets at risk. The AALT is resposible for supervisig icumbet maagemet i orgaisig ad maagig the assets of a eterprise that has bee placed ito the Bakruptcy Procedure ad serves as a itermediary betwee the court, the eterprise ad its creditors. The AALT also advises the court o matters related to the Restoratio, Liquidatio or bakruptcy of the eterprise ad carries out ay court orders regardig the liquidatio of assets. The followig assets form the bakrupt estate of the eterprise ad are dealt with accordig to the Bakruptcy Procedures: (a) assets ad rights to assets which the busiess had at the time the court accepted the bakruptcy petitio; (b) profits, assets ad rights to assets which the busiess had prior to the court acceptig the bakruptcy petitio; (c) if a secured party is over-collateralised, the the excess proceeds from the sale of the secured asset will costitute a asset of the busiess ad be subject to the Bakruptcy Procedures; ad (d) the value of ay lad use rights. Permitted busiess activities durig Bakruptcy Procedures Although the eterprise may cotiue as usual durig the Bakruptcy Procedure, it will be subject to the supervisio of the court ad the AALT. Durig the operatio of the Bakruptcy 136 A guide to Asia Pacific restructurig ad isolvecy procedures

137 Procedures the eterprise may ot, without prior writte coset of the court: (a) pledge, mortgage, assig, sell, doate or lease ay asset; (b) receive assiged assets; (c) termiate performace of a valid cotract; (d) borrow ay loa moies; (e) sell or covert shares or trasfer owership rights of ay assets; or (f) pay ay ew debt arisig from busiess activities or wages of employees. After commecemet of the Bakruptcy Procedures, the eterprise is prohibited from: (a) cocealig or disposig of assets; (b) payig ay usecured debt; (c) abadoig or reducig ay right to claim a debt; ad (d) covertig usecured debts ito debts secured by assets of the eterprise. Moratorium durig Bakruptcy Procedures A automatic moratorium arises from the date a bakruptcy petitio is filed with the court, durig which time o proceedigs by usecured creditors may be commeced or cotiued. Similarly, secured creditors may oly eforce their security with the approval of the court. Restoratio Procedure With iformatio from both the eterprise ad its creditors at had, the court will covee a meetig of the eterprise s creditors to: (a) discuss the eterprise s fiacial situatio; (b) if the creditors cosider that the eterprise is recoverable, approve a resolutio to recover the eterprise s busiess; ad (c) place the eterprise ito Restoratio. If the creditors cosider that the eterprise s busiess is ot recoverable, the the court will place the eterprise ito Liquidatio. The Restoratio procedure commeces upo the court acceptig the creditors decisio to restructure the eterprise s busiess. Oce the Restoratio procedure has bee iitiated, the eterprise is obliged to submit a pla to rescue the busiess, detailig how the eterprise iteds to repay its debt ad restructure its busiess operatios ( Restoratio Pla ). However, a creditor or ay other party also has the right to formulate a Restoratio Pla for cosideratio by the court. The Restoratio Pla must idetify the measures to be take for the recovery of the busiess operatios, icludig: (a) raisig ew sources of capital; (b) chagig productio ad busiess goods of a eterprise; (c) reewig productio techology; A guide to Asia Pacific restructurig ad isolvecy procedures 137

138 (d) restructurig the eterprise s or the cooperative s maagemet apparatus ad mergig or de-mergig productio divisios to ehace productivity ad productio quality; (e) issuig ew shares to creditors; (f) sellig or leasig uecessary assets; or (g) other measures ot cotrary to law. Oce the Restoratio Pla has bee prepared, it is first submitted to the court for cosideratio ad approval before beig submitted to creditors for approval. This requires a vote by a majority of usecured creditors holdig at least two-thirds of the total usecured debt. Oce the Restoratio Pla receives both court ad creditor approval, otice of the approval will be set to all creditors ad published i a ewspaper, ad the Restoratio Pla will become effective. The Bakruptcy Law provides that the Restoratio Pla must be implemeted withi three years from the date the otice of the Restoratio Pla was published i a ewspaper. Durig the three year implemetatio period, the eterprise must submit semi-aual reports to the court ad creditors are uder a obligatio to supervise the implemetatio of the Restoratio Pla. Ay amedmets to the Restoratio Pla must be approved by the requisite majority of creditors ad the court. Secured Creditors i Restoratio A automatic moratorium arises from the date a bakruptcy petitio is filed with the court. Secured creditors may oly eforce their security with the approval of the court. 138 A guide to Asia Pacific restructurig ad isolvecy procedures Liquidatio I a Liquidatio, the assets of the eterprise are liquidated ad proceeds distributed to its creditors. A court will order the liquidatio of a eterprise where: (a) the Restoratio Pla fails such that the eterprise is uable to repay its due debts at the request of its creditors; (b) the creditors meetig is usuccessful as a result of: (i) the legal represetatives of the eterprise failig to participate i the creditors meetig without plausible reasos; or (ii) the creditors meetig failig to achieve quorum after havig already bee adjoured oce (where the petitioer is the legal ower or legal represetative of the eterprise); ad (c) after the creditors meetig, the requisite majority of creditors have passed a resolutio to develop a Restoratio Pla ad: (i) the eterprise fails to formulate a Restoratio Pla withi 30 days of the date o which the iitial creditors meetig resolved to recover the busiess; (ii) the creditors meetig rejects a resolutio approvig the Restoratio Pla; or (iii) the eterprise fails to implemet or implemets improperly a court-approved Restoratio Pla. A cocered party may appeal the decisio to commece the Liquidatio procedure.

139 Priority of claims ad distributio The court must also prescribe a pla for the distributio of proceeds i accordace with the followig priority: 1. fees ad costs of the bakruptcy proceedigs; 2. upaid wages, allowaces for termiatio of employmet, social isurace, ad other iterests uder siged collective labour accords ad labour cotracts; ad 3. usecured debts, icludig tax debts, owed to creditors whose ames appear o the list of creditors. Ay balace remaiig after all creditors have bee paid i full is distributed to the members or equity holders of the eterprise. The Bakruptcy Law does ot address i ay detail the process to effect the liquidatio/sale of the assets of the eterprise. All debts which are udue are dealt with as due debts but there is o etitlemet to iterest i favour of the eterprise for the period up to the due date. Secured Creditors i Liquidatio A secured creditor may oly eforce its security durig the Liquidatio procedure with the approval of the court. Priority is grated to secured creditors subject to such security beig i place prior to the date o which the court accepted the petitio. Where the value of the secured assets is isufficiet to cover the debt of a secured creditor, the secured creditor ca claim as a usecured creditor for the shortfall. Declaratio of Bakruptcy Oce the Liquidatio procedure is complete, the court will declare the eterprise bakrupt. Oce a eterprise is declared bakrupt the court will forward the declaratio to the busiess registratio office for removal of the bakrupt eterprise s ame from the busiess registry. AALT Emergecy Procedures The AALT may apply to the court to seek temporary emergecy measures to protect the assets of a isolvet eterprise for the beefit of its creditors. The AALT may seek a order to: (a) permit the sale of perishable goods, goods ear their ed of use date, or goods which may be difficult to sell uless sold at the right time; (b) physically secure the assets of the busiess; (c) freeze the bak accouts of the busiess; (d) secure the fuds of the busiess; (e) seize the accoutig records ad related busiess data; ad (f) prohibit the performace of, or a order for the compulsory performace of, a umber of specified acts by the busiess or by other related idividuals or orgaisatios. Voidable Trasactios The followig trasactios are ivalid if etered ito by a isolvet eterprise aytime withi the three moth period prior to the acceptace of a bakruptcy petitio by the court: (a) property doated to other persos; (b) the etry ito ay cotract i which the obligatio of the eterprise was clearly greater tha that of the other party; A guide to Asia Pacific restructurig ad isolvecy procedures 139

140 (c) the paymet of debts that at the time of paymet were ot due; (d) the gratig of security over assets i respect of existig debts; or (e) the etry ito ay other trasactio for the purpose of disposig of the assets of the busiess. Persoal Liability Followig the declaratio of a eterprise as bakrupt: (a) the geeral directors; (b) the Chairma; (c) the members of the board of maagemet (i shareholdig compaies); (d) the board members (i limited liability compaies); (e) the ower (i a private eterprise); ad (f) the parters (i a partership), of the bakrupt busiess are prohibited from holdig similar positios i ay other busiess ad establishig a busiess of ay type for oe to three years. The geeral directors ad members of the board of maagemet of a bakrupt State owed eterprise ( SOE ) with 100% State capital will be permaetly prohibited from holdig the same positio i ay SOE. A perso assiged to represet the State s equity i ay eterprise that is declared bakrupt will be permaetly prohibited from holdig ay maagerial positio i ay eterprise with State capital. The oly exceptio to the prohibitios discussed above is whe the bakruptcy arises due to reasos of force majeure. Leder Liability There is o requiremet uder Vietamese law which reders a leder liable to pay its customers debts. New Moey Ledig Ay ew borrowig by a eterprise durig the Bakruptcy Procedures requires the prior writte coset of the court. There is o restrictio o leders providig ew credit facilities to eterprises that are subject to Bakruptcy Procedures, however it is ucommo for credit istitutios to led moey to such eterprises i these circumstaces. Whe this does occur, as expected, ledig coditios ad security requiremets are tighter. Guaratees Vietamese law allows a party to give a guaratee to secure the performace of obligatios of aother party, regardless of whether the two parties are related. As log as the guaratee is executed i accordace with Vietamese law (e.g., i writig, ad i some circumstaces otarised or certified, ad siged by a authorised sigatory of the guarator), the guaratee is eforceable agaist the guarator. The guaratee should explicitly refer to the obligatios beig guarateed ad should state that i the evet that the pricipal is uable to perform its obligatios owed to the beeficiary, the guarator will perform the guarateed obligatios i accordace 140 A guide to Asia Pacific restructurig ad isolvecy procedures

141 with the origial agreemet or o other agreed terms acceptable to the beeficiary. Recogitio of foreig isolvecy proceedigs There is o formal recogitio of foreig isolvecy proceedigs by Vietamese courts. Creditors are required to istitute local proceedigs or obtai a judgmet i a foreig court ad seek to have it recogised by the Vietamese courts. Oly recogised foreig judgmets may be eforced agaist the assets of a eterprise which are located i Vietam. Recogitio of a foreig judgmet To eforce a foreig judgmet i Vietam, the judgmet holder (the applicat) must apply to the appropriate Vietamese court to have the foreig judgmet recogised. This requires submittig a request to the Miistry of Justice ( MOJ ) together with the documets required by the relevat treaty. Withi seve days of receivig a completed applicatio, the MOJ will trasfer the file to the court authorised to hadle such proceedigs. The authorised court is required to accept the case for hearig, ad a pre-hearig will take place withi four moths from the date of acceptace of the case. The time limit may be exteded by a two moths if the court requires the applicat or the foreig court which haded dow the judgmet to clarify ay uclear issue. Durig the pre-hearig, the court may susped the hearig or proceed directly to the hearig. If the court decides to coduct a full hearig, the hearig must commece withi oe moth from the date of the court s decisio to do so. The court will the issue a decisio o whether it will recogise the foreig judgmet. The court may declie to recogise the foreig judgmet where: (a) the foreig judgmet is ot effective accordig to the law of the coutry where the foreig judgmet was made; (b) the judgmet debtor or his or her legal represetative did ot atted the trial or hearig before the foreig court because he or she was ot legally summoed; (c) the case ca oly be adjudicated by a Vietamese court; (d) the case was also cosidered by a Vietamese court ad the judgmet issued thereto has become effective; (e) the case was settled by aother foreig court whose judgmet has previously bee recogised by the Vietamese court; (f) the case has previously bee accepted ad cosidered by a Vietamese court before the foreig court accepted the case ad haded dow its judgmet; (g) the time limit for eforcemet of the foreig judgmet has expired accordig to the law of the coutry where the foreig judgmet was made or accordig to Vietamese law (which is curretly five years); or (h) the recogitio ad eforcemet of the foreig judgmet i Vietam is cotrary to the fudametal priciples of Vietamese law. There is curretly o guidace o the types of claims which might be cotrary to the fudametal priciples of Vietamese law. A guide to Asia Pacific restructurig ad isolvecy procedures 141

142 Eforcemet of a foreig judgmet Uder the Civil Procedure Code, a foreig judgmet which has bee recogised by a Vietamese court will have the same effect as a judgmet redered by a Vietamese court. The eforcemet of the judgmet is govered by the Law o Eforcemet. A applicatio for the eforcemet of a judgmet must be filed withi five years from the effective date of the judgmet or arbitral award. Where a time limit for fulfillig a obligatio is set out i the judgmet or arbitral award, the five-year time limit will begi from the date the obligatio is due to be performed. For judgmets ad arbitral awards subject to periodical eforcemet, the five-year time limit will apply to each period ad be couted from the date the obligatio is due to be performed. Judgmets of foreig courts ad foreig arbitral awards recogised by Vietamese courts must be eforced by the relevat provicial-level eforcemet agecies. 142 A guide to Asia Pacific restructurig ad isolvecy procedures

143 Our Iteratioal Network Abu Dhabi Clifford Chace 9th Floor, Al Sila Tower Sowwah Square PO Box Abu Dhabi T F Amsterdam Clifford Chace Droogbak 1A 1013 GE Amsterdam PO Box AG Amsterdam T F Bagkok Clifford Chace Sidhor Buildig Tower 3 21st Floor Wireless Road Pathumwa Bagkok T F Barceloa Clifford Chace Av. Diagoal Barceloa T F Beijig Clifford Chace 33/F, Chia World Office Buildig 1 No. 1 Jiaguomewai Dajie Beijig T F Brussels Clifford Chace Aveue Louise 65 Box 2, 1050 Brussels T F Bucharest Clifford Chace Badea Excelsior Ceter Academiei Street 12th Floor, Sector 1, Bucharest, T F Casablaca Clifford Chace 169 boulevard Hassa 1er Casablaca T F Doha Clifford Chace Suite B 30th floor Torado Tower Al Fuduq Street West Bay PO Box Doha T F Dubai Clifford Chace Buildig 6, Level 2 The Gate Precict Dubai Iteratioal Fiacial Cetre PO Box 9380 Dubai T F Düsseldorf Clifford Chace Köigsallee Düsseldorf T F Frakfurt Clifford Chace Maizer Ladstraße Frakfurt am Mai T F Hog Kog Clifford Chace 28th Floor Jardie House Oe Coaught Place Hog Kog T F Istabul Clifford Chace Kayo Ofis Biasi Kat. 10 Büyükdere Cad. No Levet, Istabul T F Kyiv Clifford Chace 75 Zhylyaska Street Kyiv T +38 (044) F +38 (044) Lodo Clifford Chace 10 Upper Bak Street Lodo E14 5JJ T F Luxembourg Clifford Chace 2-4, Place de Paris B.P L-1011 Luxembourg Grad-Duché de Luxembourg T F Madrid Clifford Chace Paseo de la Castellaa Madrid T F Mila Clifford Chace Piazzetta M. Bossi, Mila T F Moscow Clifford Chace Ul. Gasheka Moscow T F Muich Clifford Chace Theresiestraße Muich T F New York Clifford Chace 31 West 52d Street New York NY T F Paris Clifford Chace 9 Place Vedôme CS Paris Cedex 01 T F Perth Clifford Chace Level St Georges Terrace Perth WA 6000 Australia T F Prague Clifford Chace Jugamaova Plaza Jugamaova Prague 1 T F Riyadh (Co-operatio agreemet) Al-Jadaa & Parters Law Firm Buildig 15, The Busiess Gate Kig Khalid Iteratioal Airport Road Cordoba District, Riyadh, KSA. P.O.Box: 3515, Riyadh 11481, Kigdom of Saudi Arabia T F Rome Clifford Chace Via Di Villa Sacchetti, Rome T F São Paulo Clifford Chace Rua Fuchal º-adar São Paulo-SP T F Seoul Clifford Chace 21st Floor, Ferrum Tower 66 Sooha-dog, Jug-gu Seoul Korea T F Shaghai Clifford Chace 40th Floor, Bud Cetre 222 Ya A East Road Shaghai T F Sigapore Clifford Chace Maria Bay Fiacial Cetre 25th Floor, Tower 3 12 Maria Boulevard Sigapore T F Sydey Clifford Chace Level 16 No. 1 O Coell Street Sydey NSW 2000 T F Tokyo Clifford Chace Akasaka Tameike Tower 7th Floor , Akasaka Miato-ku Tokyo T F Warsaw Clifford Chace Norway House ul.lwowska Warsaw T F Washigto, D.C. Clifford Chace 2001 K Street NW Washigto, DC T F *Clifford Chace s offices iclude a secod office i Lodo at 4 Colema Street, Lodo EC2R 5JJ. The Firm also has a co-operatio agreemet with Al-Jadaa & Parters Law Firm i Riyadh.

144 Cotacts Australia Scott Bache Parter T: E: cliffordchace.com Michael Lishma Parter T: E: cliffordchace.com Philip Sealey Cousel T: E: cliffordchace.com Daiel Collis Seior Associate T: E: cliffordchace.com Chia Hog Kog Stephe Harder Parter T: E: cliffordchace.com Kelly Gregory Parter T: E: cliffordchace.com Jiahua Ni Parter T: E: cliffordchace.com Mark Hyde Global Head of Restructurig ad Isolvecy T: E: cliffordchace.com Doa Wacker Parter T: E: cliffordchace.com Matt Truma Parter T: E: cliffordchace.com Peter Kiler Parter T: E: cliffordchace.com Virgiia Lee Parter T: E: cliffordchace.com A guide to Asia Pacific restructurig ad isolvecy procedures

145 Cotacts Hog Kog Japa Patrick O Coor Cosultat T: E: patrick.ocoor@ cliffordchace.com Masayuki Okamoto Parter T: E: masayuki.okamoto@ cliffordchace.com Hidehiko Suzuki Parter T: E: hidehiko.suzuki@ cliffordchace.com Leg-Fog Lai Parter T: E: leg-fog.lai@ cliffordchace.com Sigapore Adrew Brereto Parter T: E: adrew.brereto@ cliffordchace.com Adrew Gambarii Parter T: E: adrew.gambarii@ cliffordchace.com Nish Shetty Parter T: E: ish.shetty@ cliffordchace.com Harpreet Sigh Parter T: E: harpreet.sigh@ cliffordchace.com Thailad Fergus Evas Parter T: E: fergus.evas@ cliffordchace.com Keerati Kajaaweich Cousel T: E: keerati.kajaaweich@ cliffordchace.com A guide to Asia Pacific restructurig ad isolvecy procedures