Transcript Document 7145078

ADB - RETA 5975 Regional Insolvency Cooperation
FAIR Session III
Managing Major Asian Collapses:
The Importance of Insolvency Frameworks for
Foreign Direct Investment and Risk
Management in Asia
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ADB - RETA 5975 Regional Insolvency Cooperation
Overview of Session
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Ron Harmer, International Consultant to the ADB
ADB - RETA 5975 Regional Insolvency Cooperation
Overview of Session
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Insolvency laws part of systemic risk management
infrastructure of region and countries
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Only one country - Japan - has a “modern” cross border
insolvency regime in Asia
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Proposals developed in Korea and the Philippines
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No viable formal means of dealing with a pan-Asian collapse in
spite of increasing interdependence
ADB - RETA 5975 Regional Insolvency Cooperation
Overview of Session
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Complete inability for dealing with major corporate
collapses in Asia adversely impacts on systemic risk
management
Asian Pulp and Paper exemplifies the need to reform
of cross border insolvency regimes
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Michael Sloan to present APP case study
ADB - RETA 5975 Regional Insolvency Cooperation
Overview of Session
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Regional treaty for cross border insolvency law
reform is an option
Lessons can be learned from initial difficulties with
EEC cross-border insolvency regulation
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Economic arguments in favour of insolvency law
reform
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Ron Harmer to review the EEC experience
Michael Sloan
ADB - RETA 5975 Regional Insolvency Cooperation
Overview of Session
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Insolvency law reform will aid attraction of foreign
investment
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Possible regional solutions
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Stanley Tai of the New York Life International LLC and Mr.
Nagarajan Srinivasan of the Indian Commonwealth Development
Corporation.
Ron Harmer
ADB - RETA 5975 Regional Insolvency Cooperation
APP Case Study
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Michael Sloan, Blake Dawson Waldron
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APP Case Study
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AP&P incorporated in Singapore
Operations throughout Asia
$US 13.9 billion “collapse”
Lenders, shareholders and bondholders affected
worldwide
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ADB - RETA 5975 Regional Insolvency Cooperation
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ADB - RETA 5975 Regional Insolvency Cooperation
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ADB - RETA 5975 Regional Insolvency Cooperation
Subsidiaries
Australia
Belgium
British Virgin Islands
China
France
Hong Kong
India
Indonesia
Italy
Japan
Malaysia
Spain
Singapore
Taiwan
UK
USA
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ADB - RETA 5975 Regional Insolvency Cooperation
Lenders
Austria
Bahrain
Belgium
Canada
China
Denmark
Finland
France
Germany
Hong Kong
Indonesia
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Italy
Japan
Netherlands
Norway
Singapore
South Africa
Spain
Sweden
Taiwan
Thailand
UK
USA
ADB - RETA 5975 Regional Insolvency Cooperation
Shareholders
China
France
Germany
Indonesia
Japan
Netherlands
Singapore
Switzerland
UK
USA
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ADB - RETA 5975 Regional Insolvency Cooperation
APP Case Study
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12 March 2001 unilateral debt standstill announced
by AP&P
Application in Singapore for appointment of judicial
managers
Basis for application:
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Unilateral declaration of Standstill
Lack of progress with Standstill
Need for independent control
ADB - RETA 5975 Regional Insolvency Cooperation
APP Case Study
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APP successfully resisted application due to:
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Lack of creditor support
Inability of judicial mangers to take effective control of group
No reorganisation plan agreed yet
ADB - RETA 5975 Regional Insolvency Cooperation
Dealing with multi-national
administrations
 Ron
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Harmer, International Consultant to
ADB
ADB - RETA 5975 Regional Insolvency Cooperation
European Insolvency Regulation
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An ambition of the Treaty of Rome (1960)
Attempt at a convention failed (2001)
Commenced life as a regulation (31 May 2002)
Now applies to 25 member states (Denmark is the
only exception; binds all accession states)
Deals solely with cases of insolvency in which the
debtor has its centre of main interests or an
establishment in at least one of the member states
ADB - RETA 5975 Regional Insolvency Cooperation
Member countries of the
EU
Recent accession
countries
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ADB - RETA 5975 Regional Insolvency Cooperation
EUR: Jurisdiction
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Article 3.1: “The courts of a Member State within the
territory of which the ‘centre of a debtor’s main
interests is situated’ shall have jurisdiction to open
insolvency proceedings. In the case of a company or
legal person, the ‘place of the registered office’
shall be presumed to be the ‘centre of main interests’
in the absence of proof to the contrary.”
ADB - RETA 5975 Regional Insolvency Cooperation
EUR: Jurisdiction (continued)
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Recital 13 to the preamble of the EUR states: “The
centre of main interests should correspond to the
place where the debtor conducts the administration
of his interests on a regular basis and is therefore
ascertainable by third parties.”
ADB - RETA 5975 Regional Insolvency Cooperation
EUR: Applicable Law and Effect
of Opening
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Article 4 states that the “law applicable to an
insolvency proceeding shall be the law of the
member state in which the proceedings are
opened.”
Article 16 states that “any judgment opening
proceedings that is handed down in a Member State
shall be recognised in all other Member States.”
ADB - RETA 5975 Regional Insolvency Cooperation
EUR: Public Policy Provision
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Article 26 states that a Member State may refuse to
recognise insolvency proceedings opened in another
state…if the effects of such recognition…would be
manifestly “contrary to the state’s public policy
and….its fundamental principles or the
constitutional rights and liberties of the
individual.”
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ADB - RETA 5975 Regional Insolvency Cooperation
EUR: COMI Use and Practice
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Statistical and other information is not provided
Many decisions are unreported
UK/Irish decisions suggest problems with issues of
jurisdiction
Consider cases of Enron Directo SA (2002), Brac
Rent-a Car (2003), Daisytek (2003) and Parmalat
(2004)
ADB - RETA 5975 Regional Insolvency Cooperation
Brac Rent-a-Car case
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Brac was incorporated in Delaware, USA
It never traded in USA
Its operations were conducted in England
The English court held that insolvency proceedings
could be opened in England because its COMI was in
England
ADB - RETA 5975 Regional Insolvency Cooperation
Enron Directo case
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Enron Directo was incorporated in Spain
It conducted its daily operations there
English court held that insolvency proceedings could
be commenced against Enron Directo in England on
the basis that the ‘head office’ functions of Enron
Directo were run from the European headquarters of
Enron Directo which was situated in London
ADB - RETA 5975 Regional Insolvency Cooperation
Daisytek case
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Holding (or parent company) incorporated in England
Three, wholly owned by the parent, subsidiaries were
incorporated in Germany and one in France
English court opened insolvency proceedings in
respect of all four subsidiaries on the basis that their
respective COMI was in England because most of the
trade creditors considered that the important
functions of the subsidiaries were carried out in
England, in the office of the parent
ADB - RETA 5975 Regional Insolvency Cooperation
Daisytek case (continued)
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Insolvency proceedings were brought in France in
respect of the French subsidiary and in Germany in
respect of one of the three German subsidiaries
In France, court of first instance determined that the
COMI of the French subsidiary was in France and
purported to open main proceedings accordingly.
That was overturned on appeal.
ADB - RETA 5975 Regional Insolvency Cooperation
Daisytek case (continued)
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In Germany, court of first instance opened main
proceedings in respect of the subsidiary. On appeal
the German proceedings were closed, following a
finding that the manager of the German subsidiary
had authorised the English proceedings.
ADB - RETA 5975 Regional Insolvency Cooperation
Parmalat case
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Parmalat SpA was incorporated in Italy in []
It commenced life in Collecchio, Italy as a producer of
dairy products
Although itself controlled by a family group, Parmalat
spread throughout Europe, South America, Asia and
Australia
ADB - RETA 5975 Regional Insolvency Cooperation
Parmalat (continued)
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It performed this growth through a 20 year long
acquisitions policy
That policy was financed through offshore financing
vehicles, including Eurofood IFSC Limited
(‘Eurofood’)
Eurofood was incorporated in Ireland
It was a single purpose vehicle formed for the
purpose of raising USD150 million through a bond
issue
ADB - RETA 5975 Regional Insolvency Cooperation
Insolvency of Parmalat
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A massive hole of some USD7 billion in the assets of
Parmalat SpA was discovered in December 2003
The Italian government, acting under a decree
passed on 23 December 2003, placed Parmalat
under extraordinary administration on 24 December
and appointed a special commissioner
ADB - RETA 5975 Regional Insolvency Cooperation
Insolvency of Eurofood
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Eurofood is incorporated in Ireland
It is a wholly owned subsidiary of Parmalat SpA
On 27 January 2004, Bank of America filed a winding
up petition against Eurofood in the High Court of
Ireland
On the same day the Irish court appointed a
provisional liquidator to Eurofood
ADB - RETA 5975 Regional Insolvency Cooperation
Insolvency of Eurofood
(continued)
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On 9 February 2004 the Italian government purported
to place Eurofood under extraordinary administration
and appointed Bondi as special commissioner
(subsequently confirmed by an Italian court on 20
February)
ADB - RETA 5975 Regional Insolvency Cooperation
Insolvency of Eurofood
(continued)
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On 23 March 2004, the Irish court determined that:
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The Italian court lacked jurisdiction (because it could not ignore
the Irish decision of January 2004)
The COMI of Eurofood was in Ireland (because it was
incorporated there and because that was where its creditors
believed its COMI to be)
The decision of the Italian court was against public policy
(because no notice and no opportunity was given to the Irish
creditors to be heard in the Italian proceedings)
ADB - RETA 5975 Regional Insolvency Cooperation
Insolvency of Eurofood
(continued)
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An appeal was made to the decision of the Irish court
The appeal court, although it upheld the judgment of
the Irish court, referred two matters to the European
Court of Justice:
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Whether the Irish or Italian courts had ‘opened main proceedings
Whether the Irish court was entitled to invoke Article 26 of the
EUR (the ‘public policy’ issue)
ADB - RETA 5975 Regional Insolvency Cooperation
Comparisons with the Uncitral X
Border Model Law
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No experience of it
Adopts similar jurisdiction criteria to that of the EUR
ADB - RETA 5975 Regional Insolvency Cooperation
How big is the ‘problem’ of COMI
under the EUR?
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It may be argued that the problem should be confined and
should not be regarded as a general issue concerning
COMI (and consequent ‘forum shopping’) but rather in the
failure of the EUR to deal with that issue in the context
of groups of companies and associated companies
(note that the Uncitral X Border Model Law is also silent
on this issue)
There is an absence of a provision in the EUR that
requires co-operation between courts, judges and
administrators (cf. UNCITRAL Model Law)
ADB - RETA 5975 Regional Insolvency Cooperation
Relevance for Asia
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Any bi or multi-lateral cross-border arrangements
should address more particularly the issue of COMI
(or similar)
Particular provisions concerning the approach to be
taken in respect of groups/ related/or associated
companies may be desirable and necessary
ADB - RETA 5975 Regional Insolvency Cooperation
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ADB - RETA 5975 Regional Insolvency Cooperation
Economic Rationale for Reform
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Asian economies linked to global economy:
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Insolvency laws:
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Degree of dependence on international trade
Level of foreign investment
Degree of foreign ownership of share market
Overseas debt
Don’t yet recognise globalisation
Weak protection of domestic and international interests
ADB - RETA 5975 Regional Insolvency Cooperation
Economic Rationale for Reform
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Michael Sloan, BDW
ADB - RETA 5975 Regional Insolvency Cooperation
Sizes of economy
Source of data: The World Bank Group
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Trade in goods as a share of GDP
Source of data: The World Bank Group
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Present value of debt in 2002
Source of data: The World Bank Group and the Korean Ministry of Finance and Economy
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ADB - RETA 5975 Regional Insolvency Cooperation
Economic Rationale for Reform
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Investment flows linked to quality insolvency laws
Weak insolvency systems result in longer and deeper
recessions
ADB - RETA 5975 Regional Insolvency Cooperation
Economic Rationale for Reform
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Weak governance systems:
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Weak insolvency systems could:
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Discourage investment
Increase price of capital
Undermine effectiveness of bond markets
Discourage investment in bond markets
ADB - RETA 5975 Regional Insolvency Cooperation
Adequacy of Liquidation Laws and their application
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Adequacy of Rescue Laws and their application
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ADB - RETA 5975 Regional Insolvency Cooperation
Attitude of International Investors
to Inadequate Insolvency laws
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Stanley Tai, New York Life International LLC
Nagarajan Srinivasan of the Indian Commonwealth
Development Corporation.
ADB - RETA 5975 Regional Insolvency Cooperation
Solutions
Ron
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Harmer, Consultant BDW
ADB - RETA 5975 Regional Insolvency Cooperation
Major Corporate Collapses
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No ability to deal with a major Asian corporate
collapse
Need to implement law reform
Options include regional treaty and model law
Not mutually exclusive
Treaty preferred option at present
Also require informal workout protocols to operate
across borders
ADB - RETA 5975 Regional Insolvency Cooperation
Institutional Capacity
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Quality laws not sufficient, need institutional capacity
Problems include:
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Lack of fairness in trials
Corruption
Lack of expert judges
Lack of qualified professionals
ADB - RETA 5975 Regional Insolvency Cooperation
Institutional Capacity
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No quick fix but measures to improve include:
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Develop rules for communications between courts
Employment of Interpreters
Development mutual understanding by judicial conferences and
exchange of information between courts
Development of court protocols
ADB - RETA 5975 Regional Insolvency Cooperation
Out of Court Proceedings
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Courts do not have to be involved in all areas of an
insolvency administration
Out of court processes possible
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United Kingdom, Singapore, Hong Kong, China and Australia all
have out of court processes
Introduction of such frameworks in Asia may
circumvent some issues around institutional capacity
ADB - RETA 5975 Regional Insolvency Cooperation
Cross Border Treaty
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A regional cross border treaty would assist in dealing with major corporate
collapses
That treaty must address:
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Issues surrounding the definition of the location of the centre of main interest for a group of
companies
Cooperation between courts
Formalities required for commencement of an application for recognition
Recognition for both 'in-bound' and 'out-bound' insolvency administrations
the effect of recognition;
cooperation between courts;
the possible approaches to accommodating different types of insolvency administrations;
evidence required of commencement of insolvency administrations
the formalities required for commencement of an application for recognition.
ADB - RETA 5975 Regional Insolvency Cooperation
Solutions – Informal Workout
Principles
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Adoption of Informal Workout Protocols by Banking
Associations
Facilitation
ADB - RETA 5975
Regional Insolvency Cooperation
Agreement
Administrative
Committee
Financial Institution Creditors
>10% Initiate Workout
Initial Standstill Period
First Meeting of Financial
Institution Creditors
Standstill
Ends
No
Workout
Workout
Committee
Extended Standstill
No Cooperation
by Creditor
Standstill
Ends
Extended
Standstill
Negotiate
Workout
Agreement
No
Workout
Standstill
Ends
FIC Meeting to
Consider Workout
No
Workout
Workout
Agreement
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Failure
Success